Baosteel's Option Debut

Bao steel came big as it scared the market surprisingly on last week in a strange way: Market fell sharply in its biggest loss in the year by nearly 4%. While so far so good as we saw no strange cash move from this largest steel maker in China, its Stock option will debut next Monday.

Admittedly though the market has been predicting the opening price of this option, nobody could make a good guess. This is such an inefficient market and beyond that there is no reasonalble volatility to apply and no comparable on its peer in China. Its stock price over the year has captured the market's weired performance, so on and so forth. I here chose a US steel maker Nucor Corp (NUE) as a comparable company.

(1)Using a simple binominal approach, its historical low was at CNY3.5 level and high at 7.5. If we lend at 2% risk free rate, by replicating a call option we get its price at CNY0.85. (Delta is 0.75). Here we ignore volatility and other greek letters)

(2)Now let's put forward volatility and go into more complex way. This is a model built on binomy model and the talent of spreadsheet.

S 4.62
K
sigma 0.3/0.6 (per period)
r 0.01519005 (per period compound rate)
div 0.005 (per quarter)
T 1
N 56
h 0.017857143
u 1.041185989
d 0.960964381
p* 0.489979045 This is risk neutral probality.
1-p* 0.510020955

The theoretic value is 0.58 at sigma 30% and 1.026 at Sigma 50%. Dividend is certainly a big thing in the calculation and affect option price by 10 percent is we assume no dividend paid in the coming year.

(3)Again we use the other most popular pricing method, black-schole model,

Black-Scholes Directly in a Excel Sheet


Stock price 4.62 S
Strike price 4.50 X
Years to maturity 1.00 T
Risk-free rate 2.20% r
Volatility 50.0% v

European call value 1.00 call value
European put value 0.79 put value

d1 0.3466
d2 -0.1534

50% volatility is preferred since too many factors affect the market and Shanghai stock market is infamous for its flucturation. Steel industy itself is facing currency revaluation and business cycle, which also has to do with the foreseeable recession next year as many economists worry the sloppy consumer spending.

Going back to basics, as far as underlying stock price of Baosteel, 4.62 is still reasonable even though its trailing P/E 9% is much higher than Nucor. But the punch line might be in china there can forecast more growth while in US Nucor is in a sunset industry. So the stock price of Baosteel can possibly be bullish in short run until one day the government starts to kick off the big metal.

So my personal belief is the option should be priced starting from 0.58, some key numbers are 0.64, 0.85, and 1, the uplimit might be 1.27. However I really tend to believe the market is going to push it higher than that, especially if they believe the whole market is bullish for next year.

Deja vu GOOG, etc.

The big star over the week has been Baidu (ticker BIDU)obviously. The search engine had its debut several days ago with a first day gain more than 350%, the largest gains since the tech bubble in the beginning of the century. It certainly gives a surprising push on NASDAQ and ignites new IT imagination. It ends down yesterday back in 100 bucks and to a great extent retrieve its fantasy. It seems that the market is still painfully in recall of its ordeal from 2001. But GOOGLE story is still up there and the perspective on new IT firm and its Chinese background will for sure make up the road for this new comer in Wall Street.

Across the ocean bade careful change the views of Chinese investor as how to value a growing company, especially for technology firms. The equity market reform is in high for 2 weeks and all the stocks with the cap of "G" jumped since last week. The question is fundamental: Will the market recover ultimately as a result of this hard effort for the regulatory body to float state owned shares?

And of course all the change came out the surprising Yuan revaluation on July 20, which served as a catalyst for the big change. We don't know how big the change will for and what it meant for Chinese financial market. But we all know something so important is happening now and it might be for a whole lot of people the best approach to shape their wealth going forward in their life, and probably the way people live.