IInvestors in Saber Corp (Symbol: SABR) have seen the start of trading new options this week, through March 18th. In the Stock Options Channel, the YieldBoost formula looked up and down the SABR options chain of the new March 18th contracts and identified one buy contract and one call contract of particular interest.
A strike price of $8.00 has a current bid of 50 cents. If the investor were to sell to open this sell contract, he would commit to buying the stock at $8.00, but would also collect the premium, setting the cost basis for the shares at $7.50 (before broker commissions). For an investor already interested in buying SABR shares, this can be an attractive alternative to paying $8.61/share today.
Since the strike of $8.00 is an approximate 7% 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 66%. 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 6.25% on the cash obligation, or 40.77% annually – in Stock Options Channel we call this YieldBoost.
Below is a graph showing the subsequent twelve-month trading history for Saber Corp, highlighted in green where the $8.00 strike falls for that date:
Moving to the ask side of the options chain, a call contract with a strike price of $9.00 has a current bid of 67 cents. If an investor had to buy shares of SABR stock at the current price level of $8.61/share and then sell that call contract to open it as a “covered call,” he is obligated to sell the stock at $9.00. Given that the call seller would also collect the premium, which would generate a total return (excluding dividends, if any) of 12.31% 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 SABR shares really rose, which is why looking at Saber Corp’s twelve-month trading history, as well as examining the business fundamentals, becomes important. Below is a chart showing the twelve month trading history of the SABR, with the $9.00 strike highlighted in red:
Given the fact that the $9.00 strike represents an approximate premium of 5% over the stock’s current trading price (in other words, it’s not available at that percentage), there’s also the possibility that the covered call will expire worthless, in which case the investor keeps both of his or her shares of shares and 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 a 7.78% increase in additional return to the investor, or 50.76% per annum, which we refer to as YieldBoost.
Implied volatility in the sell contract example, as well as the buy contract example, both are close to 70%.
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 $8.61) to be 60%. 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.