Whats MM thoughts towards MFG Options?

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Question asked 06/05/2022

Whats MM thoughts towards MFG Options?

Hello team, Appreciate the continual insights offered each week, especially your candidness about the ups and down of investing that acts as a much needed counter-balance. I recently took the plunge with Magellan, hoping to catch a dip. Good thing I left room to average in the mid 20s. Not to worry. They have recently issued options at 1:8 for existing shareholders. I have never traded options before so I'm a little naive. Can you explain to me what they are, and also, your thoughts on how the options might trade If MFG rally or plateau? I noted the directors all poured in around $10k in the first few days, snapping up the options around 80-90c. Many thanks.

Answer

Hi Alan,

The MFG options (MFGO) are currently trading around $1.50, they were clearly mispriced when they fell down to 55c in late April as investors simply cashed in their “free” options. These are a very long term bonus issue allowing investors to buy MFG shares at $35 anytime between now and 16th April 2027 i.e. not exciting just yet when the stocks around $17.50, but they could be.

Over the next 5 years, if MFG rallies, these options will move higher as well. As a holder we could simply sell them or we can hold them and see how it all plays out. If for example, MFG is trading at $45 at expiry in 5 years time, the options would be worth $10 – in other words, MFGO’s are basically a long dated leveraged play on the stock.

We hold a small exposure to MFG in our Income Portfolio and the current momentum is at least looking good short term for 15-20% upside but we feel the company needs a period of stabilisation after the ructions around Hamish Douglass before many fund mangers are likely to consider re-entering the stock.

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Magellan Financial Group (MFG)

LAST UPDATED 06/05/2022 11:44

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