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I've got the chance to sell my options at 50p today but want to stay in for the 'long haul'. What date can we actually buy in at 32p a share.
casapinos, there's sometimes a trade to be had in the rights arbitrage. e.g. if you can long RRN for less than 32p below you can short RR. You then close when the arb narrows or take up the rights to net off the RR. short.
That's what quite a few traders, including me, did with HMSO/HMON because there was a very good arbitrage to be had, with HMON trading way below the logical level. I think that was due to the extraordinarily deep rights (25 for 1 as I recall), smack in the middle of a FTSE relegation (how daft is that, when you have index funds in the mix).
Whilst to the uninitiated it may look risk neutral there's always the danger of the short side being called in at very short notice, as they tried to do with HMSO.
Hi could someone please spare 5 minutes to explain to a newbie "whats going on".
I bought £2k of RR shares a couple of weeks back at £1.80 via Barclays Smart Investor. My original holiding now shows a loss and I have 10 new shares for every 3 I held that show a profit, so overall my investment is still showing a similar profit to before the Rights Issue .
The thing is I thought I had to buy the new shares, it appears I've been given them, I have the option to sell. ?
My investor account says respond by 9th November but when I click it says Default Option applies - what does that mean?
I was expecting that I would have to purchase the 10 for 3 shares at 32p, am I not getting that option ?
I would appreciate any clear explanation - work on the for dummies approach.
Will selling x rights drag the price to 50p ?
Pole, maybe, but two points , first I don't know how liquid the market in RRN might be and second would buying pressure on RRN automatically drive the price of RR up ?
Woke up this morning with my theory floating round in my head and still working it through, but thanks again for the useful responses, and while I'm being nice to you , I award you this boards monthly prize for perseverance in trying to explain to the uninitiated!
But if I chose to exercise them rights then effectively I have only paid 32p for these shares and if I decide to RRN for 50 and buy these in the open market then same thing applies. Total overall cost depends on original price people have paid.
Funds building positions here as they always do, after balance sheet update and oversubscribed bonds etc.
RR most viewed and bought stock since yesterday. Check it out.
Thanks casapinos.
In your scenario, provided you can realise the gains on the RRN shares without exercising them, I think the gearing comes about through the RRN shares being at a discount to RR. If you want to play that gearing you might as well be buying the RRN shares? The lower price on the RR. shares, the higher the gearing in RRN.
Or are you under thinking things?
If RR. currently trade at 82p, RRN trade at 50p.
You have a choice. Do you pay 32p to exercise those rights and get more RR. shares (currently worth 82p), or do you sell them for 50p.
If you decide to take up the rights, what has it cost you? 32p? But hang on, aren't you forgetting the 50p you could have got selling those rights? For the simple pressing of a button that's cash in the bank. Therefore taking up the rights costs you 82p, same as anyone else in the market today.
Poleaxe , thanks for the thoughtful reply . You are of course right that the profit is not 400+%, though both you and I have mentioned here that the cost of the rights includes the imputed loss on the original shares I had omitted it from my early morning cogitations.it is also true that exiting the position is tricky , but perhaps if what I proposed is going on, the originator(s) are relying on the herd instinct , drive the price up by well-timed and managed buying , stimulate a response from the market and gradually exit while the rest of the herd careers onwards and upwards. The markets tendency to over react has been apparent through much of this year, so perhaps we might see that Goldma...... sorry an unnamed US investment bank have already sold a few shares , and will continue to drip them away both before and after conversion. Maybe the shorters were in part right, but as ever its timing that counts.
I think you are overcomplicating things, people had option to buy these shares at 32p of they decided to participate in rights issue, so lets say somebody gets 32p shares today and sell them for 83.7 and keep their original holding .Here people have all sort of higher averages but one thing is sure that they had a chance to participate in rights issue and get these for 32p.
There is gap to be filled - as only 1/3 shares issued back to holders - and buying here to right price - 150/180p. will get there, a little patience, as funds need to take new positions
Yes shamI89, if someone bought 300 RR. shares before yesterday for £100 they could be sitting on a nice profit. When could they have bought them for 33.33p? In 2003 perhaps?
Also bear in mind at the start of the week they'd have been sitting on a 700% profit on those shares!
today you can sell your original shares at a huge loss and the rights which are being traded too. the two combined will ensure >parity of book cost
What about if somebofy bought these share at 100 and then used them to get 32p rights issue shares.For Arguments sake lets say they bought 300 shares at 100 and used them to get 1000 shares at 32p.Total money they have spent is £620 to get 1300 shares and their average price is less than 50p per share, surely they he/she would be sitting on 60% profit.
That's an interesting idea casapinos and I'm trying to think it through too.
The price of the RRN nil paid rights is obviously linked to the RR. price, being approximately 32p below RR.
What some people may not fully appreciate is that about 2/3rd of the value of their original investment in Rolls-Royce RR. shares is in now the RRN nil paid shares.. The value got transferred from open yesterday.
Therefore, addressing your question, yes if you can somehow manipulate a rise in RR. your RRN shares should track. I get that, but I don’t think it gives you a 4.333% gain in your original investment. That’s because you’re ignoring that most of the value of your investment is tied up in the nil paid rights shares.
If RR. trade at 82p the RRN will trade at about 50p. That means that for every 82p you have invested in RR. you’ve got another 166.67p invested in RRN. Of course, if you ignore the value you’ve got tied up in RRN it will flatter your percentage gains, but you can’t. It’s similar to people thinking they can make a profit selling the rights they exercised at 32p, ignoring the drop on the original shares they suffered yesterday.
Another problem I see is how do you realise your gains? In order to realise those gains you either have to sell RRN (thin market?) or take up the rights and subsequently sell them fully paid. If you take up the rights it will cost you 106.67 per RR. share you hold. That's an additional cash investment which will dilute your percentage gains.
It is a bit of a brain teaser!
Well said Casapinos.
I follow your logic.
There are better brains on here than mine, so interesting to see any-one else's take on things.
Try and keep it fairly straight forward though, as Casa did.
I've been trying to work out what happened yesterday and more importantly why .I 've been investing in the markets for a loooong time and cannot ever recall a FTSE 100 share acting in that way . So I' ve been seeking to analyse it and here's what I think .
ALL holders who bought before the deadline now hold assets which are effectively one share at market price and an associated call option on 3.33 shares at 32p.At yesterday mornings open each share was worth about 75p and each right about 75-32, say 43p but as the SP rose , for each 1p rise, your assets rise by1p per share and ~1p for each associated right ie the package of( one share plus the associated 3.33 rights) goes up by 4.33p.
Lets assume I am a nameless very large US investment bank with several percent of RR's entire share capital and I have enough cash to move the market. I start steadily buying , knowing that for every penny upwards I can move the market , I am increasing the value of my assets by 4.33p.An outlay of a few million ,brings a potential 433% return, if I can manage the exit . The next few days RNS's will be interesting.
I keep assuming there must be a flaw in the logic above because after all RI's are not uncommon and none , in my memory have acted like this , but maybe it is the high discount and the 10 for 3 ratio which creates a very highly geared play and makes the trade I have outlined possible and profitable.
If my theory holds, it means two things one the price action is going to continue to be wild for the next two weeks and two we have the makings of a disorderly market in RR shares.
Still doubtful that I am missing something obvious , I would welcome comment, criticism or clarification.