TxAg
one contract is for 100 shares. So, if you buy the June 2012 $3 call for $.40, you are paying $.40 per share x 100 shares = $40. That gives you the option to buy the stock for $3 any time between now and when the option expires (June 15th).
Theoretically, the further out you go, the higher the premium between the option contract price and strike price. As you get closer, that gap narrows.
From a math standpoint, if you actually plan on using the options to buy the shares, the price has to get to $3.40/share for you to break even (since you've already paid out the $.40 share up front).
However, since this stock is going to either blaze up or crash and burn depending on the drilling results, the options are a way to put less money on the table and achieve greater results than buying the stock itself.
For example, let's throw out the following assumptions (these numbers are strictly for illustrative purposes): Stock is $2.20 today. If the well is a dud, the stock goes to $.90/share (value of options goes to $0). If the well logs are good and it looks like paydirt, the stock spikes to $5 (the $3 options spike to $2.50). Remember, HDY is all about volatility at this point.
And, let's assume you want to spend $3k on this stock.
$3k will buy you ~1,363 shares.
If it's a dud, your $3k turns in to $1,227 (loss of $1,773). If it spikes, your $3k turns in to $6,818 (gain of $3,818).
Now, if you're willing to stomach losing the $1,773, look at the option side. $1,773 will buy 44 contracts for the June $3 call. If it's a dud, you're out the same $1,773. However, if it spikes on good news, your $.40 call turned in to a $2.50 call that you can sell/flip (worth $11k, or a gain of $9,227).
So, you have to put $3k on the line to make $3,818 buying the stock, or put $1,773 on the line to make $9,227 doing the options.
The catch?
For one, if the drilling results don't come out by the option date, it's a bust (this is why I went with the June 2012 options, to give them 4 more months to get this well finished).
Two, if you hold the stock and it tanks to $.90, you still have shares that could rise in the future to gain your loss back (whereas the options expire worthless and you're just flat out that money).
You just have to weigh the pros/cons and determine your level of gamble. For me, this stock is going to be a clear busto / boom spike depending on the drilling results. If it's a bust, I have ZERO confidence in waiting for them to re-group, raise more money, find another prospect, get it drilled, and make some headlines, all in the name of getting my money back. I'd just sell my position and put what's left in another investment. Thus, the options are the best for me, because I'm betting on the spike, that the positive results come in before the option expiration, and yield a much greater return on my investment vs. buying the stock at $2.20
[This message has been edited by Blue-eyes (edited 2/9/2012 8:01p).]
