Canadian CANNAINVESTOR Magazine November 2018 | Page 223

175

the Canadian Derivatives Clearing Corporation (CDCC).

5)A Call is for 100 shares. For example, if a Call is priced at $2 then it costs $200 to buy because the Call controls 100 shares (100 shares at $2 = $200).

6)Ignore transaction costs. Transaction costs for Options may vary widely depending on accounts held and where and the type of account. Typically Canadian Options are bought on the Montreal Exchange.

7)This document, titled “Rules of the Montreal Exchange” updated September 21, 2018 is considered accurate and you are strongly encouraged to download it and read it thoroughly. Any discrepancies between that document and the content in CannaInvestor Magazine shall result in the “Rules of the Montreal Exchange” document being considered accurate. A list of Options available on Canadian exchanges can be found here. There are more links on Options at the end of this article.

8)That the investor understands that options expire and could have reduced liquidity meaning the investor could lose 100% of the investment.

EXAMPLE 1: BUYING A CALL (“BUY TO OPEN”)

After what seemed to be a never ending bearish market, an investor in mid August believes the trend is about to reverse and this investor is particularly bullish on Aurora Cannabis (ACB). Most people I know, including myself, became bullish on the sector quite literally within two days before the Constellation news with respect to Canopy Growth. On August 14th the share price and the warrant price of ACB were $5.34 and $3.21 respectively.

Let’s assume the investor wants 1000 shares. The investor could buy 1,000 shares or 1,000 of the Aurora Warrants. The warrants have a strike price of $4 and do not expire until November 2, 2020 and do not have an acceleration clause. The investor had a short time horizon assuming there would be an industry sell off starting on October 17th and therefore will sell her investment on October 15th at 3:50pm. On that day and at that time the share price and warrant price were $15.22 and $11.20 respectively for an ROI of 185% from the shares and 150% from the warrants. Not bad for two months! What if she looked at Call Options instead?

There are many different Call Options available for Aurora including some that trade with the spinoff company shares and warrants and some that do not. Let’s assume that the investor although bullish and with an October 15th exit strategy elected to buy Options that do not expire until January 18, 2019 just as a time horizon hedge. The investor as we know was very bullish on Aurora so chose an $11 strike price. What that means is for every contract purchased the investor can choose to exercise her right to purchase 100 shares of Aurora at a price of $11 each. One would expect a low price on October 14th because the share price of Aurora was less than half of the Call Option strike price. Let’s assume she paid $0.30 for Jan 18, 2019 $11 Calls of ACB on August 14th. $0.30 was the last price and the range that day was $0.20 to $0.30. In order to be able to exercise her right, if she wanted to, to buy 1000 shares of ACB she would need to buy 10 contracts. The cost per contract would be $300 and ten contracts would cost $300. Given she was considering a $5,340 investment for 1000 shares she likes the Option play even though she knows she could lose 100% of her investment because she is willing to risk $300. For this type of transaction, the order or command typically used by brokers is called “buy to open”.

223