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Author: mungofitch Big gold star, 5000 posts Top Favorite Fools Top Recommended Fools Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 14513  
Subject: Re: FKA: LUK Date: 6/26/2013 9:22 PM
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This is a very unusual option contract.

The usual rule is this:
Options are price on a per share basis, not per contract basis.
Regardless of the multiplier, your net entry price for a call is strike
plus quoted premium so the quoted price is the premium per share you're paying.

However, in this odd case (underlying LUK2, not LUK), the multiplier is
100 for the contract value but 81 shares for the deliverable.
http://www.google.ca/url?sa=t&rct=j&q=&esrc=s&am...
I've done tens of thousands of options contracts over the years but I've
never seen these numbers as a mismatch except in the case of complex deliverables.
e.g., two different sets of shares or a cash component. Not applicable here.

Why the breaking of the rule?
It's really is a complex deliverable, just an unusual case in the unusual case category.
This is why the ticker doesn't match. It pays to read the fine print.

For a quoted premium of around $5.50 you pay $550 per contract to get 100 LUK2 rights.
i.e.., the right but not the obligation to buy 100 share of LUK2 (not LUK)
at $15 apiece any time you want up to expiry date.
Separately, each LUK2 right gives you 0.81 Leucadia LUK shares.
So technically the multiplier is still 100, it's just that the
underlying deliverable isn't 100 LUK per contract, it's 100 LUK2.
It just so happens that 100 LUK2 is equal to 81 LUK.
Thus, the rule at the top is preserved: the price you pay is the
price premium per share of the underlying regardless of the multiplier.
It's just that the underlying in this case is LUK2 not LUK.
Arrrggghh.

So, what's the net entry price?
Buy 1 LUK2 $15 call contract at quoted $5.50 per share for $550.
Exercise the day before expiry at a total cost of 100*$15=$1500.
Get 100 LUK2 for a net entry cost of 100 * (15+5.50) = $20.50 per share.
But that's $20.50 per share of LUK2 which is now really per 0.81 share LUK.
So, your net entry per LUK share is 20.50/.81 = $25.31.
With today's LUK price at $25.01, that's a premium of 31 cents.
Think of that as interest for the loan of 100*$15=$1500 for ~7 months.
In effect you're paying an interest rate of around 3.5%/year rate, plus the very small dividends you forego.

Jim
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