Agilent Technologies, Inc. (symbol: A) investors saw new options expiring in May 2023 trading this week. One of the most important data points that goes into the price an option buyer is willing to pay is time value, so the newly traded contracts with 245 days to expiration present a potential opportunity for put or call sellers, a higher premium than to achieve for which contracts with near expiry would be available. At Stock Options Channel, our YieldBoost formula scanned up and down the A option chain for the new May 2023 contracts and identified a put and a call contract of particular interest.
The put contract at a strike price of $120.00 has a current bid of $8.10. If an investor should sell to open this put contract, they commit to buying the stock at $120.00 but also collect the premium, making the cost basis of the shares $111.90 (before brokerage commissions). For an investor already interested in buying shares of A, this could present an attractive alternative to today’s $129.95/share.
Since the $120.00 strike price represents a discount of about 8% to the stock’s current trading price (in other words, it’s out of the money by that percentage), there’s also a chance that the put contract will expire worthless. The current analytical data (including Greeks and implied Greeks) suggests that the probability of this happening is currently 69%. Stock Options Channel will track these odds over time to see how they change and will post a chart of these numbers on our website under the contract details page for that contract. Should the contract expire worthless, the premium would represent a return of 6.75% on the cash obligation, or 10.06% on an annualized basis – at Stock Options Channel we call that the yield boost.
Below is a chart showing the back 12 month trading history for Agilent Technologies, Inc. and highlighting in green where the $120.00 strike is relative to that history:
On the call side of the option chain, the call contract at a strike price of $135.00 has a current bid of $10.60. If an investor were to buy A-share shares at the current price level of $129.95/share and then sell this call contract as a “covered call” to open it, they are committing to the stock at $135.00 to sell. Considering that the call seller will also collect the premium, this would result in a total return (excluding dividends, if any) of 12.04% if the stock is called at expiration in May 2023 (before brokerage commissions). Of course, there could potentially be a lot of upside on the table if A-shares really do rally, so it’s important to look back at Agilent Technologies, Inc.’s 12-month trading history and study fundamentals of the business. Below is a chart showing A’s past 12-month trading history, with the $135.00 strike highlighted in red:
Given that the $135.00 strike price represents a premium of approximately 4% over the stock’s current trading price (in other words, it’s out of the money by that percentage), there’s also a possibility that the covered call contract would expire worthless, in which case the investor would retain both their equity interest and the premium received. The current analytical data (including Greeks and implied Greeks) suggests that the current probability of this is 47%. On our website, under the contract detail page for that contract, the Stock Options Channel tracks these quotes over time to see how they are changing and publishes a chart of these numbers (options contract trading history is also graphed). Should the covered call contract expire worthless, the premium would represent an additional 8.16% return increase for the investor, or 12.15% on an annualized basis, which we refer to as the yield boost.
The implied volatility in the put contract example is 38%, while the implied volatility in the call contract example is 34%.
Meanwhile, we calculate the actual volatility over the last 12 months (taking into account the closing values for the last 252 trading days and today’s price of $129.95) to be 33%. For more put and call option contract ideas worth checking out, 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.