IInvestors in Digital Turbine Inc (Symbol: APPS) have seen the start of trading new options this week, up until 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 233 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, the YieldBoost formula looked up and down the APPS options chain of new contracts on September 16 and identified one buy contract and one call contract of particular interest.
A short contract with a strike price of $40.00 has a current bid of $9.30. If the investor sells this sell contract to open, he commits to buying the stock at $40, but will also collect the premium, setting the cost basis for the shares at $30.70 (before broker commissions). For an investor already interested in buying APPS shares, this can be an attractive alternative to paying $40.98/share today.
Since the $40 strike represents 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 64%. 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 23.25% on the cash obligation, or 36.43% annually – in Stock Options Channel we call this YieldBoost.
Below is a graph showing the trading history for the next twelve months for Digital Turbine Inc, highlighting in green the position of the $40 strike relative to that date:
Moving to the ask side of the options chain, a call contract with a strike price of $45.00 has a current bid of $8.60. If an investor has to buy shares of APPS stock at the current price level of $40.98/share and then sell that buy contract to open it as a “covered call,” he is obligated to sell the stock at $45.00. Given that the call seller would also collect the premium, which would have generated a total return (excluding dividends, if any) of 30.80% if the stock was called away on the Sept 16 date (before broker commissions). Of course, a lot of upside could be left on the table if APPS shares really rose, which is why looking at Digital Turbine Inc’s twelve-month trading history, as well as studying the business fundamentals becomes important. Below is a chart showing the twelve month trading history of APPS, with the $45.00 strike highlighted in red:
Given the fact that the $45.00 strike represents an approximate premium of 10% 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 43%. 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 20.99% increase in additional return to the investor, or 32.88% per annum, which we refer to as YieldBoost.
The implied volatility in the sell contract example is 82%, while the implied volatility in the buy contract example is 81%.
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 $40.98) to be 81%. 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.