IInvestors in Ares Management Corp (Symbol: ARES) have seen new options begin trading this week, through September 16th. One of the key data points that goes into the price an option buyer is willing to pay, is the time value, so with 238 days to expiration, new trading contracts represent a potential opportunity for short or long sellers to make a higher premium than would be available for contracts with closer expiration . In the Stock Options Channel, our YieldBoost formula looked up and down the ARES options chain of new contracts on September 16th and identified one buy contract and one call contract of particular interest.
A put contract with a strike price of $40 has a current bid of 40 cents. If the investor were to sell to open this sell contract, he would commit to buying the stock at $40, but would also collect the premium, setting the cost basis for the shares at $39.60 (before broker commissions). For an investor already interested in buying ARES shares, this can be an attractive alternative to paying $73.40/share today.
Since the strike of $40 represents an approximate discount of 46% 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 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 detail page for this contract. If the contract expires worthless, the premium will represent a return of 1.00% on the cash obligation, or 1.53% annually – in Stock Options Channel we call this YieldBoost.
Below is a chart showing the subsequent twelve-month trading history for Ares Management Corp, highlighting in green where the $40 strike falls relative to that date:
Moving to the ask side of the options chain, a call contract with a strike price of $90.00 has a current bid of $1.05. If an investor were to buy shares of ARES stock at the current price level of $73.40/share, and then sell that buy contract to open it as a “covered call,” he is obligated to sell the stock at $90.00. Given that the call seller would also collect the premium, which would generate a total return (excluding dividends, if any) of 24.05% if the stock was called at expiration on September 16th (before broker commissions). Of course, a lot of upside could be left on the table if ARES shares really rose, which is why looking at Ares Management Corp’s twelve-month trading history, as well as examining the fundamentals of the business, becomes important. Below is a chart showing the twelve month ARES trading history, with the $90.00 strike highlighted in red:
Given the fact that the $90.00 strike represents an approximate 23% increase to the stock’s current trading price (in other words, it’s not available by that percentage), there’s also the possibility that a covered call will expire worthless, in which case the investor keeps all 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 80%. 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 1.43% of the investor’s additional return, or 2.19% per annum, which we refer to as YieldBoost.
The implied volatility in the sell contract example is 54%, while the implied volatility in the buy contract example is 40%.
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 $73.40) to be 29%. 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.