Investors at Arch Capital Group Ltd (Ticker: ACGL) saw new options start trading this week, for the October 21 expiry. At Stock Options Channel, our YieldBoost formula scoured the ACGL options channel for new contracts on October 21 and identified one particularly interesting put and call contract.
The put contract at the strike price of $40.00 has a current bid of 5 cents. If an investor were to sell to open this put contract, they agree to buy the stock at $40.00, but will also collect the premium, placing the base cost of the stock at $39.95 (before brokerage commissions ). For an investor already interested in buying shares of ACGL, this could represent an attractive alternative to paying $46.67/share today.
Since the strike price of $40.00 represents a discount of approximately 14% from the current stock price (in other words, it is out of play by that percentage), it is also possible that the contract of sale expires worthless. Current analytical data (including Greeks and implied Greeks) suggests that the current chance of this happening is 95%. Stock Options Channel will track these odds over time to see how they change, by posting a table of these numbers on our website under the contract detail page for that contract. If the contract expires worthless, the premium would represent a return of 0.12% on the cash commitment, or 0.76% annualized – at Stock Options Channel, we call this the Yield increase.
Below is a chart showing the last 12 months trading history for Arch Capital Group Ltd, and highlighting in green where the $40.00 strike falls in relation to that history:
On the call side of the options chain, the call contract at the strike price of $50.00 has a current bid of 15 cents. If an investor were to buy ACGL stock at the current price level of $46.67/share and then sell to open this purchase contract as a “covered call”, they are committing to selling the stock at 50 $.00. Assuming the call seller will also collect the premium, this would result in a total return (excluding dividends, if any) of 7.46% if the stock is called at the October 21 expiry (before broker commissions) . Of course, a lot of upside could potentially be left on the table if ACGL shares really soar, which is why it becomes important to look at Arch Capital Group Ltd’s trading history for the last twelve months, as well as study the fundamentals of the business. Below is a chart showing ACGL’s trading history over the last twelve months, with the $50.00 strike highlighted in red:
Considering that the strike price of $50.00 represents a premium of approximately 7% to the current stock price (in other words, it is out of the price by that percentage), it It is also possible for the covered call contract to expire worthless, in which case the investor would keep both his shares and the premium collected. Current analytical data (including Greeks and implied Greeks) suggests that the current chance of this happening is 75%. On our website, under the contract detail page for that contract, the Stock Options Channel will track those odds over time to see how they change and publish a table of those numbers (the option contract’s trading history will be also plotted). If the covered call expires worthless, the premium would represent an increase of 0.32% in incremental return to the investor, or 1.96% annualized, what we call the Yield increase.
The implied volatility in the example sell contract is 28%, while the implied volatility in the example buy contract is 29%.
Meanwhile, we calculate that the actual volatility for the last twelve months (considering the closing values for the last 251 trading days as well as today’s price of $46.67) is 24%. For more put and call options contract ideas worth considering, visit StockOptionsChannel.com.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.