Spec Share Options

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Spec Share Options

Spec share option vs Exchange Traded Option(ETO).

An ETO is an option over a big top 200 stock, you can either write or buy that option and it is then traded on the separate automated trading system called the Derivatives Trading Facility (DTF). . It can be a put or a call.

To trade ETOs you have to sign a special client agreement with your broker

The spec share options are issued by smaller ASX listed companies themselves. They are call options (no puts). They enable you to subscribe to shares in that company for a given price (strike price) up to a given date (expiry). They are listed under a seperate code but traded on the same SEATS market as the company share. You do not have to sign a client agreement. You can trade these on your regular account.

How much should the option be worth

The Value of any option is based on three main variables

1) INTRINSIC....The REAL value of the option based on the relationship between the stock price and the strike price. Eg if the stock is at 25c and the option is at 20c strike there is a REAL or intrinsic value of 5c because we can exercise the option, buy shares at 20c, then sell them in the market at 25c. If the stock is at 10c the option has no REAL or intrinsic value it only has some value based on HOPE.

2) TIME....The longer the option has to run the more HOPE you have so the hope value of an option is higher for an option with a longer time to expiry.

3) VOLATILITY.....There is a higher probability that stock that has big swings will move up and trade at a given target than a stock that is very quiet and does nothing. So the HOPE value of an option is higher for volatile stocks. Eg NCP which trades all over the place has a volatility of 40% so the options are much more expensive than TLS whose volatility is around 16%.

The theoretical value of an option is calculated using quite a complex equation the Black Scholes formula using these inputs and the interest rate.

Options on ASX spec stocks in the 10c to 30c strike range tend to trade between 40% and 80% Volatility. I tend to use 60% as a rough guide but it varies from stock to stock.

USE OUR FREE OPTION CALCULATOR

CLICK LINK BELOW

You may save to your pooter or use in the browser

SPEC OPTION CALCULATOR CLICK HERE

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Madcow's Traders Bookshop. All the books you can read on

Trading spec options....tips.

Many spec options trade ridiculously far above a fair value. If you buy one of these you are taking a bet on a horse with the bookie and getting 10 to 1 odds on a horse that has a 50 to 1 chance of winning. You may get lucky and still win on that one horse but if you keep betting 10 to 1 on 50 to 1 horses you will lose big time.

Be careful with out of the money options close to expiry. An out of the money option is worth ZERO...BUGGER ALL..DIDDLY SQUAT at expiry.

Look at your risk reward...to risk losing 100% on a trade the upside would have to be mighty big.

The short dated out of the money options are often the ones that are trading stupidly above their theoretical value. That makes buying these doubly stoopid.

Because spec options are often issued free as an incentive to take share placements, for a while where recipients take quick profits, these options can trade well under theoretical value.

So what is the washup here...efficeint market theory?...... pigs bum it's efficient.

In a market where total prats pay stupid money for worthless paper and where the impatient take a quick profit at a discount there is opportunity..............for glory..............and death

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