Why pay $1.05 for a share worth 85c?

Abi has to decide what to do about her options but …

QHi Paul, I have read your books and articles and taken your advice for many years now. In one issue of Money you were asked what you would do if you had a spare $10,000. I took your advice and purchased some shares.

Recently I received a notice regarding the expiry of listed options. It didn’t explain anything about why this was occurring.

I have 10,000 shares in this company and purchased them for 85.4 cents. My question is if I take up the new options at $1.05, do I only pay the difference between the existing share price ($1.03) and $1.05 or do I still lose the money I have already invested and then risk more than $10,000 in the new shares? I understand that there is a risk involved in any investment made.

Hi Abi, thank you for following my thoughts over the years. I do not possess any special wisdom, but owning decent shares or property, preferably both, over the long term makes a lot of sense to me.

In this case, with an option – basically an entitlement to buy more shares, priced at $1.05 with the share price at 85c – you would let the option lapse. If you took up the option, you would be paying $1.05 for a share that you could buy for 85c on the market.

The only way you would take up a $1.05 option, meaning you are paying $1.05 for each share, is if the share price was trading at or above $1.05 on the market.

Options are complex, but the key point is not to pay $1.05 for a share by taking up your options when you can buy it for 85c on market.

Based on your numbers, I suspect I know what company you have invested in, and as I write this I see its share price is well above the 85c you paid. Hopefully it will continue its excellent performance and be a good one for you.