Alright retards, time to stop munching on your breakfast crayons, send the wife to go sext her boyfriend for the next few minutes and sit the fuck down because we're going to learn about mother fucking options valuations.

Why would you read this:

Because if you're someone who wants to take a bit more risk in your investing buying options rather than stock is probably going to be your first step outside your safe zone.

What are options:

The Oxford dictionary defines options as "the scientific study of sight and the behaviour of light, or the properties of transmission and deflection of other forms of radiation." Put more simply "options are financial instruments that are derivatives based on the value of underlying securities such as stocks". Put even more simply, "an options contract offers the buyer the opportunity to buy or sell—depending on the type of contract they hold—the underlying asset." Oh, and Options are a type of derivative, got it? Good, let's move on.

How do you value an option:

There's two metrics you can qualify or exclude to reach a total value of derivatives, notional value, and market value.

Notional value is the value represented by the derivative, which is to say "what's the option currently worth?". An example would be small cap lithium miner Sayona Mining (SYA), who have options available for purchase on the ASX at a strike price of $0.02. For simplicity purposes let's assume you've got 100,0000 SYAOC options expiring 29/04/23 with a strike price of $0.02. The potional value is whatever the option is currently trading at ($0.044) less the strike price ($0.02) for a notional value of $2400. The strike price is the price you need to pay the company to exercise that option and turn it into a share.

Market value is simply what it's worth on the open market, i.e. "what's someone willing to pay for the option?". Using the above example if you wanted to buy the options contract from its current owner you'd be very unlikely to pay $2400 for it, despite this being the notional value. The real value may be higher if it looks SYA is about to drop a huge announcement that could send prices skyrocketing, in which case the SYAOC options will jump considerably and pay more than the $2400 notional value. Alternately if lithium production is expected to rise 30% tomorrow the price of lithium would therefore decrease, so you may only be willing to pay $1900 for contracts with a notional value of $2400, as there's a risk they'll be worth much less come contract expiration. Market value also takes into account the effort of fucking around of having to write to SYA to redeem the options for shares, and stump up the $0.02/share as part of the options conversion.

So how do I determine the notional value: By attending any of the 1,169 private schools or 8,373 public schools in Australia and sticking around until at least year 7 to learn the formula N=(M-S)*O. It's pretty piss easy.

N=The notional value

M=The current market value of the options

S=The strike price of the options

O=The number of options

So how do I determine the market value:

There's a few ways you can try and determine the market value, however the Black-Scholes Model is the most popular for determining what it's actually worth. These handsome mother fuckers won a Nobel prize for coming up with the formula, and you know Nobel prize winners always make good stuff. They've got a pretty complex formula, but thankfully we're able to cut more corners than the builders of a newly constructed 'luxury' Sydney apartment.

Basically you take a few different variables (which take a bit of legwork to acquire), throw them all in the Black-Scholes Blendo-matic 3000™ and it spits out a market value faster than you spit out a felched load. Here's what you'll need:

*Stock price

*Exercise price

*Time to maturity

*Annual risk-free interest rate

*Annualised volatility

U wot m8?

Yeah, some of that that looks scary to me too, but thankfully we already have a stack of that information. The stock price we know ($0.067), the exercise price we know ($0.02), the time to maturity we know (1.9 years), the annual risk-free interest rate we can find online (1.51%) and the annualised volatility we can just write to SYA to obtain. Wait, what? Write to a company? Yeah, it's possible, and it's also a good litmus test to see how competent they are as a company, if they can't even respond to your email maybe their overly ambitious exploration and extraction plans have absolutely no chance of sticking to the timeline and budget. So send them an email.

Dear Sayona Mining,

You rock, especially that part when you found all the lithium.

P.S. What's your annualised volatility?

In this instance I haven’t written to SYA, as my wife has revoked my internet privileges for calling her boyfriend a bad name, but let's assume they have a volatility of 100% because they're a small cap speculative miner. Plug it all into Black-Scholes and you get this value of 0.054. Given SYAOC options are currently trading for 0.047 that would mean they're trading below their current value, and are worth buying.

What are the upsides:

Options allow you to have a higher exposure to the company in the event of positive stock growth. Where SYA stocks trade at $0.066 the SYAOC options price of $0.044 means you have a higher upside in the event it 10 bags between now and the option expiry date, which would leave the options in the money (ITM). ITM options are options which are worth cashing in, as you make a profit by doing so. Options are also the little brother to Futures, in that you have the option to use your safe word if things aren't going well. With Futures, you don't get to use a safe word, and there's every chance you won't even get so much as a courtesy spit before being raw dogged into fulfilling your end of the contract.

What are the risks:

Options carry more risk than shares. I'll say it again, options carry more risk that shares. Options mean if your option is below the strike price on exercise date then congratulations, they're worth absolutely nothing and you lose every cent you've invested. Alternately if you're really behind the curve because your family spends too much time paddling around in the shallow end of the gene pool you may also forget to exercise your ITM options before they expire, in which case you've not only lost out on any gains, but also any money invested in pursuit of those gains.

And that's it, for the most part it's that simple. If you want to increase your upside for a stock options are a great way to do so, provided you understand what you're doing. This is by no means an exhaustive guide, it's an intro post typed by a monkey at a keyboard who was supposed to be typing out the full works of Shakespeare instead.

Go DYOR and GLTAH fellow boomers.

Bonus question - How long have we known about nominal and market value of assets:

Crassus was one of the first documented cases of realising this and exploiting the difference between the two for personal gain. He did so by using slaves as firefighters, who would rush to any building on fire, negotiate with the property owner to buy the property for Sestertius on the Denarius and then have his slaves put the fire out. By negotiating with people who are literally watching their asset value go up in flames by the second Crassus leveraged the rapidly falling market price to net a damaged property which, once restored, had a much higher notional value than the market value it traded for when it was burning to the ground. At his peak Crassus was worth more than Jeff Bezos, and his death was generally seen to be the first step in the fall of the Roman Republic. It remains to be seen if the death of Jeff Bezos will affect the American Republic, however it would lead to a nominal decrease on the Amazon stock price as Americans only know how to grieve through capitalism.

TLDR: If you're going to buy options, learn how to price them properly using the Black-Scholes method.