Investors in Hewlett-Packard Company (NYSE:HPQ) saw new options begin trading today for the May 29 expiration.
At Stock Options Channel, our YieldBoost formula has looked up and down the HPQ options chain for the new May 29 contracts and identified one put and one call contract of particular interest.
The HPQ put contract at the $31 strike price has a current bid of 83 cents. If an investor was to sell-to-open that put contract, he would be committing to purchase Hewlett-Packard stock at $31 but would also collect the premium, putting the cost basis of the shares at $30.17 (before broker commissions).
To an investor already interested in purchasing shares of HPQ, that could represent an attractive alternative to paying $31.76 per share today.
Because the $31 strike represents an approximate 2% discount 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 put contract would expire worthless. The current analytical data (including greeks and implied greeks) suggest the current odds of that happening are 58%.
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 2.68% return on the cash commitment or 19.55% annualized.
START SLIDESHOW: Top YieldBoost Puts of the S&P 500.
Below is a chart showing the trailing-12-month trading history for Hewlett-Packard and highlighting in green where the $31 strike is located relative to that history:
Turning to the calls side of the HPQ options chain, the call contract at the $32 strike price has a current bid of 81 cents. If an investor was to purchase shares of HPQ stock at the current price level of $31.76 share and then sell-to-open that call contract as a “covered call,” he would be committing to sell HPQ stock at $32.
Considering the call seller will also collect the premium, that would drive a total return (excluding dividends, if any) of 4.06% if HPQ stock gets called away at the May 29 expiration (before broker commissions). Of course, a lot of upside could potentially be left on the table if HPQ shares really soar, which is why looking at the trailing-12-month trading history for Hewlett-Packard, as well as studying the business fundamentals becomes important.
Below is a chart showing HPQ’s trailing-12-month trading history, with the $32 strike highlighted in red:
Considering the fact that the $32 strike represents an approximate 1% premium to the current trading price of HPQ 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 stock and the premium collected.
The current analytical data (including greeks and implied greeks) suggest the current odds of that happening are 54%. 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 2.57% boost of extra return to the investor, or 18.75% annualized.
START SLIDESHOW: Top YieldBoost Calls of the S&P 500.
The implied volatility in the put contract example is 27%, while the implied volatility in the call contract example is 29%. Meanwhile, we calculate the actual trailing-12-month volatility (considering the last 251 trading day closing values as well as today’s price of $31.76) to be 26%.
For more put and call options contract ideas worth looking at, visit StockOptionsChannel.com.
