Investors in Alcoa Corporation (Symbol: AA) saw new options become available today, for the August 2nd expiration. At Stock Options Channel, our YieldBoost formula has looked up and down the AA options chain for the new August 2nd contracts and identified one put and one call contract of particular interest.
The put contract at the $21.50 strike price has a current bid of $1.25. If an investor was to sell-to-open that put contract, they are committing to purchase the stock at $21.50, but will also collect the premium, putting the cost basis of the shares at $20.25 (before broker commissions). To an investor already interested in purchasing shares of AA, that could represent an attractive alternative to paying $21.72/share today.
Because the .81% return on the cash commitment, or 42.44% annualized — at Stock Options Channel we call this the YieldBoost.
Below is a chart showing the trailing twelve month trading history for Alcoa Corporation, and highlighting in green where the $21.50 strike is located relative to that history:
Turning to the calls side of the option chain, the call contract at the $23.00 strike price has a current bid of 85 cents. If an investor was to purchase shares of AA stock at the current price level of $21.72/share, and then sell-to-open that call contract as a "covered call," they are committing to sell the stock at $23.00. Considering the call seller will also collect the premium, that would drive a total return (excluding dividends, if any) of 9.81% if the stock gets called away at the August 2nd expiration (before broker commissions). Of course, a lot of upside could potentially be left on the table if AA shares really soar, which is why looking at the trailing twelve month trading history for Alcoa Corporation, as well as studying the business fundamentals becomes important. Below is a chart showing AA's trailing twelve month trading history, with the $23.00 strike highlighted in red:
Considering the fact that the $23.91% boost of extra return to the investor, or 28.57% annualized, which we refer to as the YieldBoost.
The implied volatility in the put contract example above is 48%.
Meanwhile, we calculate the actual trailing twelve month volatility (considering the last 251 trading day closing values as well as today's price of $21.72) to be 44%..