IInvestors in NXP Semiconductors NV (Symbol: NXPI) have seen new options begin trading this week, through March 11th. In the Stock Options Channel, the YieldBoost formula looked up and down the NXPI options chain of the new March 11th contracts and identified one buy contract and one call contract of particular interest.
The sell contract with strike price of $165.00 has a current bid of $5.70. If the investor were to sell to open this sell contract, he would commit to buying the stock at $165.00, but would also collect the premium, setting the cost basis for the shares at $159.30 (before broker commissions). For an investor already interested in buying NXPI shares, this can be an attractive alternative to paying $180.88/share today.
Since the $165.00 strike represents an approximate 9% discount to the stock’s current trading price (in other words, it’s out of the money by that percentage), there’s also the possibility that the sell contract will expire worthless. Current analytical data (including the Greek and the implied Greek) indicate that the current odds of this happening are 99%. The Stock Options Channel will track those odds over time to see how they change, and publish a chart of these numbers on our website under the Contract Details page for this contract. If the contract expires worthless, the premium would represent a return of 3.45% on the cash obligation, or 30.02% annually – in Stock Options Channel we call this YieldBoost.
Below is a chart showing the subsequent twelve-month trading history for NXP Semiconductors NV, highlighting in green where the $165.00 strike falls for that date:
Moving to the ask side of the options chain, a call contract with a strike price of $185.00 has a current bid of $10.30. If an investor has to buy shares of NXPI stock at the current price level of $180.88/share, and then sell that buy contract to open it as a “covered call,” he is obligated to sell the stock at $185.00. Given that the call seller would also collect the premium, which would generate a total return (excluding dividends, if any) of 7.97% if the stock was called at expiration on March 11th (before broker commissions). Of course, a lot of upside could be left on the table if NXPI shares really rose, which is why looking at the twelve-month trading history of NXP Semiconductors NV, as well as studying the business fundamentals becomes important. Below is a chart showing the twelve month trading history of NXPI, with the $185.00 strike highlighted in red:
Given the fact that the $185.00 strike represents an approximate premium of 2% over the stock’s current trading price (in other words, it’s out of the money by that percentage), there’s also the possibility that the covered call will expire worthless, in which case the investor keeps all of his shares of shares and the premium collected. Current analytical data (including the Greek and the implied Greek) indicate that the current odds of this happening are 55%. On our website under the Contract Details page for this contract, the Stock Options Channel will track those odds over time to see how they change and publish a chart of these numbers (the option contract trading history will also be plotted). Should the covered call contract expire worthless, the premium would represent an increase of 5.69% of the investor’s additional return, or 49.49% per annum, which we refer to as YieldBoost.
The implied volatility in the buy contract example above is 56%.
In the meantime, we calculate the actual twelve-month volatility (taking into account the closing values of the last 253 trading days plus today’s price of $180.88) to be 39%. For more call and put options contract ideas worth looking at, visit StockOptionsChannel.com.
The opinions and opinions expressed here are those of the author and do not necessarily reflect the views and opinions of Nasdaq, Inc.