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Investors in the Materials Select Sector SPDR Fund (symbol: XLF) today confirmed new options are now available for the April 26 expiry. In the Stock Options Channel, we looked at his XLF option chain for new contracts on April 26th with the Yield Boost Formula and identified his one put contract and his one call contract of particular interest.
The current bid price for a put contract with a strike price of $40.00 is 55 cents. If the investor offers that put contract openly, they commit to buying the stock for his $40.00, but they also collect a premium, making the stock’s cost basis (before broker commissions) $39.45. For investors already interested in purchasing XLF stock, this could be an attractive alternative to paying $40.66 per share today.
Because the $40.00 strike price represents approximately a 2% discount to the stock’s current trading price (i.e., it is out of the money by that percentage), it is also possible that the put contract will expire worthless. According to the current analytical data (including Greek and implied Greek), the probability is 66%. The Stock Option Channel will track these odds over time to see how they change and will publish a graph of those numbers on the contract details page for this contract on its website. If the contract expires worthless, the premium equates to a 1.38% return on the cash commitment, or 10.05% per annum. The stock options channel calls this “ yield boost.
The chart below shows the past 12 months of trading history for the Materials Select Sector SPDR Fund and highlights in green where the $40.00 strike is located relative to that history.
Turning to the call side of the option chain, the current bid price for a call contract with a strike price of $41.00 is 75 cents. If an investor buys his XLF stock at the current price level, which is his $40.66 per share, and offers the call contract openly as a “covered call,” the investor sells the stock at his $40.66 per share. You are committed to selling it for $41.00. Considering that the seller of the call also collects a premium, his total return (excluding dividends, if any) if the stock goes call away on his April 26th expiration (before broker commissions) is his 2.68 %. Of course, if XLF stock really soars, there could be plenty of upside potential. That’s why it’s important to pay attention to the last 12 months of Materials Select Sector SPDR Fund’s trading history and study the fundamentals of the business. Below is a chart showing the past 12 months of XLF’s trading history, with the $41.00 strike highlighted in red.
Given the fact that the $41.00 strike price represents a premium of approximately 1% to the stock’s current trading price (in other words, it is out of the money by that percentage), It is also possible that the call contract will be invalidated. If it expires worthless, the investor will retain both the stock and the premium collected. According to current analytical data (including Greek and implied Greek), the probability of such happening is currently 49%. The Stock Options Channel on the contract details page for this contract on our website will track these odds over time to see how they change and publish charts of those numbers (The trading history of option contracts is also charted). If the covered call contract expires worthless, the premium corresponds to a 1.84% increase in additional income to the investor, or an annualized increase of 13.48%. yield boost.
The put contract example has an implied volatility of 16%, while the call contract example has an implied volatility of 26%.
On the other hand, the actual volatility over the last 12 months (considering the last 251 business days’ closing price and today’s price of $40.66) is calculated to be 15%. Visit StockOptionsChannel.com for noteworthy put and call option contract ideas.
S&P 500 Top Yield Boost Calls »
See also:
• Aviation services and other dividend stocks
• MIGI Insider Purchase
• BJRI option chain
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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