Investors in Actavis plc (NYSE:ACT) saw new options begin trading today for the June 19 expiration. One of the key data points that goes into the price an option buyer is willing to pay is the time value.
So, with 70 days until expiration the newly trading contracts represent a potential opportunity for sellers of puts or calls to achieve a higher premium than would be available for the contracts with a closer expiration. At Stock Options Channel, our YieldBoost formula has looked up and down the ACT options chain for the new June 19 contracts and identified one put and one call contract of particular interest.
The ACT put contract at the $285 strike price has a current bid of $9. If an investor was to sell-to-open that put contract, he would be committing to purchase Actavis stock at $285 but will also collect the premium, putting the cost basis of the shares at $276 (before broker commissions).
To an investor already interested in purchasing shares of ACT, that could represent an attractive alternative to paying $292.99 per share today.
Because the $285 strike represents an approximate 3% discount to the current trading price of Actavis stock (in other words, it is out of the money by that percentage), there is also the possibility that the put contract would expire worthless. The current analytical data (including greeks and implied greeks) suggest the current odds of that happening are 62%.
Stock Options Channel will track those odds over time to see how they change, publishing a chart of those numbers on our website under the contract detail page for this contract. Should the contract expire worthless, the premium would represent a 3.16% return on the cash commitment, or 16.47% annualized.
Below is a chart showing the trailing-12-month trading history for Actavis and highlighting in green where the $285 strike is located relative to that history:
Turning to the calls side of the ACT options chain, the call contract at the $295 strike price has a current bid of $11.60. If an investor was to purchase shares of ACT stock at the current price level of $292.99 per share and then sell-to-open that call contract as a “covered call,” he would be committing to sell Actavis stock at $295.
Considering the call seller will also collect the premium, that would drive a total return (excluding dividends, if any) of 4.65% if ACT stock gets called away at the June 19 expiration (before broker commissions). Of course, a lot of upside could potentially be left on the table if ACT shares really soar, which is why looking at the trailing-12-month trading history for Actavis, as well as studying the business fundamentals, becomes important.
Below is a chart showing ACT’s trailing-12-month trading history, with the $295 strike highlighted in red:
Considering the fact that the $295 strike represents an approximate 1% premium to the current trading price of the stock (in other words, it is out of the money by that percentage), there is also the possibility that the covered call contract would expire worthless, in which case the investor would keep both his shares of Actavis stock and the premium collected.
The current analytical data (including greeks and implied greeks) suggest the current odds of that happening are 50%. On our website under the contract detail page for this contract, Stock Options Channel will track those odds over time to see how they change and publish a chart of those numbers (the trading history of the option contract will also be charted).
Should the covered call contract expire worthless, the premium would represent a 3.96% boost of extra return to the investor, or 20.64% annualized.
The implied volatility in the put contract example is 27%, while the implied volatility in the call contract example is 26%. Meanwhile, we calculate the actual trailing-12-month volatility (considering the last 251 trading day closing values as well as today’s price of $292.99) to be 25%.
For more put and call options contract ideas worth looking at, visit StockOptionsChannel.com.