IInvestors in Old National Bancorp (Ticker: ONB) saw new options start trading this week, for the December 16 expiry. One of the key data points that goes into the price an option buyer is willing to pay is time value, so with 235 days to expiration, new trading contracts represent a potential opportunity for traders. sellers of puts or calls to obtain a higher premium than would be available for contracts whose expiration is closer. At Stock Options Channel, our YieldBoost formula scoured the ONB options channel for new contracts on December 16th and identified one put contract and one call contract of particular interest.
The put contract at the strike price of $12.50 has a current bid of 50 cents. If an investor were to sell to open this put contract, they are committing to buy the stock at $12.50, but will also receive the premium, which will put the base price of the stock at $12.00 (before brokerage fees). For an investor already interested in buying shares of ONB, this could represent an attractive alternative to paying $15.06/share today.
Since the strike price of $12.50 represents a discount of approximately 17% 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 83%. 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 4.00% on the cash commitment, or 6.21% annualized – at Stock Options Channel, we call this the Yield increase.
Below is a chart showing the past twelve month trading history for Old National Bancorp, and highlighting in green where the $12.50 strike falls in relation to that history:
On the call side of the options chain, the call contract at the strike price of $25.00 has a current bid of 5 cents. If an investor were to buy shares of ONB at the current price level of $15.06/share and then sell to open this call contract as a “covered call”, they are committing to selling the stock. at $25.00. Assuming the call seller will also collect the premium, this would result in a total return (excluding dividends, if any) of 66.33% if the stock is called at the December 16 expiry (before brokerage commissions) . Of course, a lot of upside could potentially be left on the table if ONB shares really soar, which is why it becomes important to look at the past twelve months trading history for Old National Bancorp, as well as to study the fundamentals of business. Below is a chart showing ONB’s trading history over the last twelve months, with the strike price of $25.00 highlighted in red:
Considering that the strike price of $25.00 represents a premium of approximately 66% 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 99%. 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 0.33% in incremental return to the investor, or 0.52% annualized, what we call the Yield increase.
The implied volatility in the example sell contract is 43%, while the implied volatility in the example buy contract is 53%.
Meanwhile, we calculate that the actual volatility for the last twelve months (considering the closing values of the last 252 trading days as well as the current price of $15.06) is 26%. 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.