Random Musings: On Wilson Global (WGB) and the genius of bonus options

 

One of the long term holdings in my portfolio is Wilson Global (WGB) which is an LIC (listed investment company) run by Geoff Wilson, the legendary CEO of Wilson Asset Management. Prior to the big crash in Feb 2020, I had a small holding which I had gradually bought into as it went down and through the recovery. 

It has since become my best performing investment, vastly outperforming the Australian market and recent developments have made it into one of the more interesting ones too. 

On the 10th of February, an announcement went out which gave every WGB holder an option to purchase an additional WGB share without brokerage fee, to be exercised at any time until expiry on 12 September 2022. Early exercise of these options also comes with the benefit of dividends as they become due.

Compared to the standard capital raising process of issuing new shares, there are a lot of reasons why this is far more favourable. In the standard issue of new shares, they would need to be offered to the broader public at a price that is lower than their current value, otherwise there would be no incentive for new purchases. This in turn dilutes the current shareholders by reducing the price of their holding. On the other hand, the option issue that WGB has introduced provides less certainty about the quantum of capital to be sourced, however it keeps shareholders happy as only they are the ones who hold the power to dilute their own shareholdings.

As someone who has spent a bit of time dabbling in the theory of options trading, but never bought any personally, it provides me with a nice introduction into the derivative. Simply speaking, once the options have been issued to me, there are three choices I can make:

• Purchase further shares at $2.54 per share
• Sell the option to purchase
• Do nothing and let the options expire worthless.

As I write this post, WGB is currently trading at $2.63. It would be expected that when the option does get issued, there would be a reduction in share price to the value of the option, however just for educational purposes, I found an online options pricing calculator which utilises the Barone-Adesi And Whaley pricing model for American options gives an indication as to what each option would be worth:

The issue of these options provides me with a first taste at hands on experience in decision making with call options at no upfront cost to myself. In all likelihood, I will probably end up selling the options rather than exercising them, but picking the right time will be paramount and the tax implications will also be interesting. Exciting times ahead.

By 小福