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Company Issued Options

Options issued by a company are different to traditional options in some fundamental ways

Traditional options, that you learn about in finance and economics, are put and call options over existing shares. No new equity is created when these are exercised, and they should make no difference to the company's share price or market capitalisation. It's a conditional sale between shareholders.

In contrast, when company issued options are exercised, new shares are issued and the company receives the exercise price. This will dilute regular shareholders and increase the assets of the company (more cash), which is the whole point. In other respects, company issued options are similar to regular call options, with an expiry date, an exercise price a diminishing time value etc.

The difference is material when there is a large number of company options issued and they are "in the money" or close. In this case, there is significant total value in the options and a large chance that existing shareholders will be diluted by their exercise. In other words, some of the potential share price up-side will be captured by the option holders and the market value of the options should be added to the market capitalisation of shares when assessing value.

Another way to think about this is that the enterprise value is the same, but some of that value belongs to the option holders, so an equivalent value must be subtracted from the shareholders. This should already be reflected in the share price.

Listed options are usually issued to investors in a capital raise as an incentive. Note, there may also be a large number of unlisted company options that also impact the value of regular shares.

This kind of capital raising may fund an acquisition or expansion but often it is for working capital by a company doing a lot of R&D, or mining exploration. Often these companies have no real revenue (yet), and if their expenditure doesn't bear fruit, the options will expire worthless and they will need to raise more cash. Option holders will not participate in subsequent capital raises and the chance of existing company options finishing in the money will decrease after another cap raise.

After some digging and research, I put together a table of ASX-listed company options that I update regularly.

I hope that you find it useful.

New code on the list, ICGOD! Amen.