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Trading how do options work ?

Discussion in 'Shares' started by TheCamel, 26th Oct, 2007.

  1. TheCamel

    TheCamel Active Member

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    I'm looking at an IPO, and it's a "stapled security"

    Basically, for the provided nominal price, I get one Unit, and one Option to subscribe for a unit at an exercise price of $1.10

    As the individual security price is 1.10 for the IPO, does that mean i get 1 unit, worth 1.10, and the option to buy another unit for 1.10 later down the track, regardless of the price at the time ?

    Or does it mean i can exercise the option to take that other unit for no additional fee ?

    I'm trying to read and uderstand it in the PDS, but having difficulty with how the option works..
     
  2. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Usually an option has an exercise price (strike price), meaning the price at which you can choose to buy, regardless of what the actual share price is at the time.

    If the actual price is less than the exercise price at the time of option expiry, there's no point in exercising the option, so you'd let it lapse.

    If it is higher and you choose to exercise, you pay the exercise price for the option, and instantly make an (unrealised) capital gain of the difference between the exercise price and the actual price of the share.

    That's usually how it works anyway.
     
  3. Rob G.

    Rob G. Well-Known Member

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    Generally, if the option expires unexercised then you have a capital loss on that option.

    You need to apportion cost base of the option on a reasonable basis.

    Whereas if you exercise the option, the cost base of the new unit is the price paid including the option cost.

    Unstapling gets a bit interesting with cost base, also any tax deferred amounts distributed to you will reduce the cost base of your units, but most probably not your option.

    Your question depends very much on the PDS details though !!

    The ATO website has good articles on capital gains for investors.

    Also, the Trustee usually has a website with heaps of useful information for their investors.

    Cheers,

    Rob
     
  4. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    If it is a "free" option, then I'm assuming there is no capital loss (since cost price was zero) ??
     
  5. Rob G.

    Rob G. Well-Known Member

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    The ATO just requires apportioning of cost on a reasonable basis - whatever that means.

    Where the option has a 'value' on the date of acquisition of the stapled security, then this should likely be used.

    Pretty hard to use a market value where it is stapled, as it cannot be traded separately !!

    However, the ATO might allow consideration of any unstapled unit prices, net asset backing, present value of expected cash flows and gains, etc...

    The easiest one is if you payed a premium over the price of a basic unit.

    Of course this means the unit cost base is reduced by the cost of the option which you may not want.

    The Trust website will usually publish a relevant legal opinion or ruling to do with the stapling.

    Cheers,

    Rob