IiShares Trust Investors – The iShares Global Energy ETF (Symbol: IXC) has seen new options begin trading this week, through March 18th. In the Stock Options Channel, our YieldBoost formula looked up and down the IXC options chain for the new March 18th contracts and identified one buy contract and one call contract of particular interest.
A call with a strike price of $30.00 has a current bid of 15 cents. If the investor were to sell to open this sell contract, he would commit to buying the stock at $30.00, but would also collect the premium, setting the cost basis for the shares at $29.85 (before broker commissions). For an investor already interested in buying IXC shares, this can be an attractive alternative to paying $30.60/share today.
Since the $30.00 strike is an approximate 2% 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 58%. 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 0.50% on the cash obligation, or 3.26% per annum – in Stock Options Channel we call this YieldBoost.
Below is a chart showing the trading history for the twelve months after the iShares Trust – iShares Global Energy ETF, highlighting in green the position of the $30.00 strike relative to that date:
Moving to the ask side of the options chain, a call contract with a strike price of $35.00 has a current bid of 15 cents. If an investor has to buy shares of IXC stock at the current price level of $30.60/share, and then sell that buy contract to open it as a “covered call,” he is obligated to sell the stock at $35.00. Given that the call seller would also collect the premium, which would generate a total return (excluding dividends, if any) of 14.87% if the stock was called at expiration on March 18 (before broker commissions). Of course, a lot of upside could be left on the table if IXC shares really rose, which is why looking at the twelve-month trading history of the iShares Trust – iShares Global Energy ETF, as well as studying the business fundamentals becomes important. Below is a chart showing the twelve month trading history of IXC, with the $35.00 strike highlighted in red:
Given the fact that the $35.00 strike represents an approximate premium of 14% 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 each of his or her stakes of shares and premium collected. Current analytical data (including the Greek and the implied Greek) indicate that the current odds of this happening are 99%. 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 a 0.49% increase in the investor’s additional return, or 3.20% per annum, which we refer to as YieldBoost.
The implied volatility in the sell contract example above is 59%.
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 $30.60) to be 26%. For more call and put options contract ideas worth looking at, visit StockOptionsChannel.com.
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