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Sino-Forest options proving to be a big mess

Ontario Securities Commission

Peter Power/Peter Power/THE GLOBE AND MAIL

After a hearing on Wednesday morning, the Ontario Securities Commission announced that it needed an extra day before ruling whether or not Sino-Forest Corp.'s put options that are affected by its cease-trade order will be allowed to be exercised.

Taking some more time to work through all of the nuances makes sense. This issue isn't so cut and dried.

To recap, holders of about 9,000 Sino-Forest put options that are set to expire from September to January raised a stink with Canadian Derivatives and Clearing Corp. because the cease-trade prevents them from exercising the options. In turn, CDCC filed a request with the OSC, asking for these puts to be granted the right to be exercised.

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CDCC's main argument is that these puts are insurance contracts that were signed before the halt was put into effect, and that letting the holders exercise them does not constitute a new investment decision. (The new investment decision is a key part of the argument because the cease prevents new decisions from being made.)

Now that the put holders have had their say, people on the other end of the spectrum are reaching out. Their points demonstrate just how complicated it is to sort through this issue.

Chiefly, Sino-Forest options in question are American style, which means that they can be exercised at any time up to and on the exercise date. (Whereas European options can only be exercised on the exercise date.) Those who argue against CDCC claim that the right to have exercised before the puts makes these options equivalent to stocks. In other words, they say, holding a put is no different than being short the stock, and like the short sellers who are now stuck, the put holders should have exercised earlier.

Of course, there is a counterpoint to this. Puts aren't valued in the same manner as stocks. Their time to expiry has a big effect on their price. (The farther you are from the expiry date, the more value in the option because there is more time for it to land in-the-money.)

At this point, there is no right answer on the matter. But issues like this one prove just how many different things the OSC has to think about before ruling.

*This post has been updated. It originally stated that options have more value the closer they are to the expiry date.

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About the Author
Reporter and Streetwise columnist

Tim Kiladze is a business reporter with The Globe and Mail. Before crossing over to journalism, he worked in equity capital markets at National Bank Financial and in fixed-income sales and trading at RBC Dominion Securities. Tim graduated from Columbia University's Graduate School of Journalism and also earned a Bachelor in Commerce in finance from McGill University. More

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