Nearly all of the terms that you will come across that are used in connection with binary options trading are also common terms used in the main markets. ITM, meaning in the money, and OTM, meaning out of the money, are two such cases. When applied to options trading, these terms are associated with both […]
How Secondary Offerings Move an Asset
A secondary offering is when a company releases new shares of its stock after the initial public offering (IPO). As a general rule, binary options brokers don’t participate in the speculation surrounding an IPO as these companies are usually not big named companies yet, but they do offer binary options on larger companies, and these will once in a while hold secondary offerings on stock shares. When this happens, if you know how to read the situation right, there is a ton of potential for making a profit off of binaries. We’ll get you started in the right direction here.
Applying a Secondary Offering Strategy
First, you need to know that looking at secondary options and the price movement that is created as a result of this is a short term fundamental indicator, and not a technical indicator like most other binary options strategies. A secondary offering needs to be filed with the SEC, and the SEC will make this public knowledge when it occurs. Let’s say that a company is comprised of 10,000,000 shares of stock, but they want to add 5,000,000 more to what’s available to the public. This is a secondary offering.
The first big question that you need to ask yourself is why is the company having a secondary offering? There’s no limit on how high a company’s stock price can go, so what is the company hoping to gain from holding a secondary offering? Another follow up question here is, why are they going with a secondary offering and not a stock split? If they wanted to increase their shares of stock and lower prices so that future buyers are not paying as much, they could simply take the 10,000,000 shares, but the price in half, and now have 20,000,000 shares. A secondary offering just increases the number of shares that are available to the public.
If you look at a company’s overall worth, you can take the number of outstanding shares and multiply it by the share price. Going with the above example, if each share was worth $40, then $40 time 10,000,000 is $400,000,000. If the company now has 15,000,000, then it is usually safe to assume that the price will drop. The company’s value hasn’t changed, just the number of shares. To find out what a share should be worth, take the $400,000,000 and divide it by the new number of shares that exist. With 5 million more, that means that the true worth of a share is now $26.67, so you should expect the price to fall. It is unlikely to fall down that much over the course of the day, but it will almost always drop. Even if shares drop down to $28, the company has actually earned money. Still, you should always look at the reasoning behind the secondary offering to get a better idea for this.
Drawbacks to this Method of Action
The biggest drawback here is that a binary options broker might not carry the company’s stock while it is going through the secondary offering process. If this happens, you either need to look hard to find another broker, or just write it off as a lost opportunity. Also, as we mentioned above, there is typically a reason for the new shares, and it’s usually not because the company is healthy. Maybe they are trying to jockey a new owner into a leadership position within the board, or maybe they are just trying to temporarily increase cash flow before the recurring problems show their ugly heads again. Either way, a secondary offering usually means a prolonged decline in price for a company, but not always. Before you take out too many options here or risk too much, know what you are up against.Try trading with a Trusted Broker of our Choice