Difference in buying shares to buying options?

mattryanshares · 6 February 2011

Hi

Ive bought shares in PEN and im considering getting some more. However its come to my attention that i could buy PENOC or options?
Whats the difference in buying the share to the option? The share price is currently 11.5 cents and the option is 8 cents?
Pretty risky share so can I still sell the penoc the same as the pen if things turn nasty?

To convert the oc to a full share i think i just pay the dirfference in price?? At the moment its 3 cents, if the difference was more in 3 months time and i went to convert would i then pay the greater difference?

Any light on this subject would be great as well as the possible up or downsides of both would be great.

Thanks in advance as im realise newby questions can get repeditive and boring.

mattryanshares · 6 February 2011

54 views no replys, ive got a buy order in to buy Pen tomorrow at the open?
Should i cancel it and buy more Penoc???

I cant see the down side of buying penoc to buying pen???

Is it higher risk???? If so why???

JimBob · 6 February 2011

mattryanshares said:
54 views no replys, ive got a buy order in to buy Pen tomorrow at the open?
Should i cancel it and buy more Penoc???

I cant see the down side of buying penoc to buying pen???

Is it higher risk???? If so why???

With Pen, you have PEN (normal shares in the company) trading at 11.5c, PENOA -trading at 7.9c- options expiring 30 June 2012 which cost 3c to convert, and PENOC - trading at 8c - options expiring 31 December 2015.

Buying the options allows you to buy more (increased leverage) but there is also increased risk. If the share price falls below the exercise price the the options can drop to near 0c and be hard to get rid of. In this case however, PEN would have to drop to below 3c, not sure how likely that is in the future. As PEN is trading well above the 3c conversion price, there is not a great deal of extra risk currently between buying PEN or one of the options. The risk would come if the share price drops quickly and you may end up holding a parcel that you cant get rid of. Hope that helps

mattryanshares · 6 February 2011

JimBob said:
With Pen, you have PEN (normal shares in the company) trading at 11.5c, PENOA -trading at 7.9c- options expiring 30 June 2012 which cost 3c to convert, and PENOC - trading at 8c - options expiring 31 December 2015.

Buying the options allows you to buy more (increased leverage) but there is also increased risk. If the share price falls below the exercise price the the options can drop to near 0c and be hard to get rid of. In this case however, PEN would have to drop to below 3c, not sure how likely that is in the future. As PEN is trading well above the 3c conversion price, there is not a great deal of extra risk currently between buying PEN or one of the options. The risk would come if the share price drops quickly and you may end up holding a parcel that you cant get rid of. Hope that helps

Cheers Jim

Thanks heaps for the reply.

sails · 6 February 2011

mattryanshares said:
54 views no replys, ive got a buy order in to buy Pen tomorrow at the open?
Should i cancel it and buy more Penoc???

I cant see the down side of buying penoc to buying pen???

Is it higher risk???? If so why???

Matt, a lot of people don't understand options and probably opened this thread out of curiosity or to see if they could learn something.

Company options are quite different to ETOs and it pays to know exactly what the conditions are for purchasing them - most likely found in a product disclosure document of some sort likely to be found on the company website. I'm not into company options so I can't help with specifics.

Just one thing on leverage though. If you are planning to purchase a larger quantity of options than buying the shares, then it would pay to calculate what your max risk is going to be and decide if you would you be willing to risk that same amount of loss on your shares. It is quite possible to lose the entire premium with options, so using them to leverage can be a dangerous game if things go wrong.

Again, I have no experience with company options, so take or leave the above...

PS: I see that JimBob has already addressed the leverage issue...

Tysonboss1 · 6 February 2011

mattryanshares said:
Hi

Whats the difference in buying the share to the option?

When you buy the share you are actually taking an ownership interest in the underlying company.

When you buy an option your buying a contract that allows you to buy a share at a later date for a certain price. the benefits and risks of owning the option are yours to work out. I know nothing about PEN.

From what you have written, If Pen stays trading at exactly the same level the benefit would be that you could buy an option for 8c that allows you to buy a share for 3c so the total cost of that share is 11c vs 11.5 also you can earn interest on the 3c till the exercise date.

however, as already stated there are risks, the option price may move disproportionately to the share price.

It comes back to how certain you are of the companies fundamentals, if you see 11c as a sensible price to pay for a share in this company you should do it. if 11c seems expensive compared to what you are getting, then avoid it.

Also think about diloution, if the company has loads of options that will be exercised, will the shares still be worth 11.5 cents each, after all for every option that is exercised only 3c worth of value is being added to the companies balance sheet.

As I said I know nothing about PEN,

ROE · 6 February 2011

While we are on the topic of options where do you go to get options out side what offer on the ETO?

comsec ETO options only have a couple of dozen of large cap
what if I want to access to smaller cap options where do I go about acquiring them?

ROE · 6 February 2011

mattryanshares said:
54 views no replys, ive got a buy order in to buy Pen tomorrow at the open?
Should i cancel it and buy more Penoc???

I cant see the down side of buying penoc to buying pen???

Is it higher risk???? If so why???

Options has time decay and that the whole crunch of it
if your options are not in the money by expiration date
your options is worthless and kissed goodbye premium paid.

you need to map out your risk/reward scenario and ask what if
I'm out of the money...?

mattryanshares · 6 February 2011

ROE said:
Options has time decay and that the whole crunch of it
if your options are not in the money by expiration date
your options is worthless and kissed goodbye premium paid.

you need to map out your risk/reward scenario and ask what if
I'm out of the money...?

I guess my point is im totally commited to buying the share.

If Penoc is 8cents plus 3 cents to convert a total of 11cents for the full share.

An the full share is 11.5 cents then you wold buy the option and pay the 3 cents when i saw fit or needed as its currently .005 cheaper then just buying the share outright?

Yes i realise if it goes south ill infact loose more money as ive bought more shares/ options??
Up side if the share grows i have more shares and ill be happy to pay the 3 cents when conversion time is up or when i choose to sell?
Is there a lag between paying the 3 cents and converting it to a full share?

is that easily done through Commsec or do you contact Pen directly? i just have a standard commsec trading account.

So_Cynical · 6 February 2011

mattryanshares said:
Is there a lag between paying the 3 cents and converting it to a full share?

is that easily done through Commsec or do you contact Pen directly? i just have a standard commsec trading account.

Yep there a period of time between you giving PEN the 3 CPS to convert and the new shares being issued...maybe 2 weeks or so.

PEN will have posted the info on option conversion some where in a ASX release...it usually involves you paying PEN and them issuing the shares.

I found the prospectus for PENOA issued for 1 cent per share and your paying 8 CPS for em.

http://www.asx.com.au/asxpdf/20100903/pdf/31sb7p4wwsfr09.pdf

You really should of had all this info already Matt...its not a good look.

ROE · 6 February 2011

JimBob said:
With Pen, you have PEN (normal shares in the company) trading at 11.5c, PENOA -trading at 7.9c- options expiring 30 June 2012 which cost 3c to convert, and PENOC - trading at 8c - options expiring 31 December 2015.

Buying the options allows you to buy more (increased leverage) but there is also increased risk. If the share price falls below the exercise price the the options can drop to near 0c and be hard to get rid of. In this case however, PEN would have to drop to below 3c, not sure how likely that is in the future. As PEN is trading well above the 3c conversion price, there is not a great deal of extra risk currently between buying PEN or one of the options. The risk would come if the share price drops quickly and you may end up holding a parcel that you cant get rid of. Hope that helps

I never bought a company options so I assume these company options are 1 for 1 not like Exchange Trade Options of the large cap where 1 Options Contract = 1000 shares

IB12 · 6 February 2011

Wth Options you have more variables to think about. Time, volatility and price.

With shares you just think about price (and maybe time, if you're you a trader).

People say options can be cheaper or better but I don't think so.

The majority of the time the benefits of buying options disappears because it's already priced into the premium you pay. The market makers and the market in general is pretty efficient in pricing the options so there's no real benefit.

How about writing options? Well the margin you put up is the same as you would be if you had sold the same amount of shares short.

mattryanshares · 6 February 2011

So_Cynical said:
Yep there a period of time between you giving PEN the 3 CPS to convert and the new shares being issued...maybe 2 weeks or so.

PEN will have posted the info on option conversion some where in a ASX release...it usually involves you paying PEN and them issuing the shares.

I found the prospectus for PENOA issued for 1 cent per share and your paying 8 CPS for em.

http://www.asx.com.au/asxpdf/20100903/pdf/31sb7p4wwsfr09.pdf

You really should of had all this info already Matt...its not a good look.

hey thanks cynical.

Im not ashamed to admit i don't know alot about what im doing. Thing is it takes me 2 secs to put a post up here and while im googling my problem someone else may just give me the answer i seek. Or an opinion or something i havent thought.
Everything in life involves learning im just at the bottom of the shares ladder/ investing ladder!!

Difference in buying shares to buying options?

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ROE

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