IInvestors in Archaea Energy Inc (Symbol: LFG) saw new options begin trading today, for January 2023 expiry. One of the main entries that go into the price that a buyer of option is ready to pay is the time value, so with 296 days to expiration, new trade contracts represent a potential opportunity for put or call option writers to earn a higher premium than they do would make it available for contracts that are closer to maturity. At Stock Options Channel, our YieldBoost formula scoured the LFG options channel for new January 2023 contracts and identified one particularly attractive put and one call.
The put contract at the strike price of $20.00 has a current bid of $1.00. If an investor were to sell to open this put contract, they are committing to buy the stock at $20.00, but will also receive the premium, which will place the base price of the stock at $19.00 (before brokerage fees). For an investor already interested in buying shares of LFG, this could represent an attractive alternative to paying $22.33/share today.
Since the $20.00 strike represents about a 10% discount to the current stock price (in other words, it’s out of the money by that percentage), it’s also possible that the sales contract expires worthless. Current analytical data (including Greeks and implied Greeks) suggests that the current chance of this happening is 99%. 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 5.00% on the cash commitment, or 6.16% annualized – at Stock Options Channel, we call this the Yield increase.
Below is a chart showing the 12 month trading history for Archaea Energy Inc, and highlighting in green where the $20.00 strike falls in relation to that history:
On the call side of the options chain, the call contract at the strike price of $22.50 has a current bid of $2.00. If an investor were to buy LFG stock at the current price level of $22.33/share and then sell to open this call contract as a “covered call”, they are committing to sell the stock at 22 $.50. Assuming that the call seller will also collect the premium, this would result in a total return (excluding dividends, if any) of 9.72% if the stock is called at the January 2023 expiry (before brokerage commissions). Of course, a lot of upside could potentially be left on the table if LFG’s stock really spikes, which is why it becomes important to look at Archaea Energy Inc’s trading history for the past twelve months, as well as to study the fundamentals of business. Below is a chart showing LFG’s trading history over the last twelve months, with the $22.50 strike highlighted in red:
Considering that the strike price of $22.50 represents a premium of approximately 1% 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 contract expires worthless, the premium would represent an increase of 8.96% in incremental return to the investor, or 11.04% annualized, what we call the Yield increase.
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 today’s price of $22.33) is 65%. 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.