Investors in Baker Hughes Company (Symbol: BKR ) saw new options begin trading this week, due to expire on October 20. At the Stock Options Channel, our YieldBoost formula has looked up and down the BKR options chain for the new October 20 contracts and identified a put and a call contract of particular interest.
The $34.00 strike price put contract has a current bid of 35 cents. If an investor were to sell-to-open that put contract, they are obligated to buy the stock at $34.00, but will also collect the premium, which puts the cost basis of the stock at $33.65 (before brokerage commissions). For an investor already interested in buying shares of BKR, that could represent an attractive alternative to paying $34.51/share today.
Because the $34.00 strike represents an approximately 1% discount to the stock’s current trading price (in other words, it is out of the money by that percentage), there is also the possibility that the put contract will expire worthless. The current analytical data (including Greeks and implied Greeks) suggests that the current odds of that happening are 63%. Stock Options Channel will track these odds over time to see how they change and publish a chart of these numbers on our website under the contract details page for that contract. If the contract expires worthless, the premium will represent a return of 1.03% of the cash commitment, or 41.75% on an annualized basis — at the Stock Options Channel we call this YieldBoost.
Below is a chart showing the trailing 12 month trading history for Baker Hughes Company, highlighting in green where the $34.00 strike is positioned relative to that history:
Turning to the call side of the options chain, the call contract at the $35.00 strike price has a current bid of 45 cents. If an investor were to buy shares of BKR stock at the current price level of $34.51/share and then sell to open the call contract as a “covered call”, they are required to sell the stock at $35.00. Given that the call seller will also collect the premium, calling the stock at expiration on October 20 (before brokerage commissions) would yield a total return (excluding dividends, if any) of 2.72%. Of course, a lot of upside could potentially be left on the table if BKR shares really rise, which is why it becomes important to look at the trailing 12-month trading history of Baker Hughes Company, as well as study the business fundamentals. Below is a chart showing BKR’s last 12 month trading history, with the $35.00 strike highlighted in red:
Given the fact that the $35.00 strike represents approximately a 1% premium to the stock’s current trading price (in other words, it is out of the money by that percentage), there is also the possibility that the covered call contract would expire worthless, in which case the investor would keep both their shares of stock and the premium collected. The current analytical data (including Greeks and implied Greeks) suggests that the current odds of that happening are 60%. On our website under the contract details page for this contract, the stock options channel will track these odds over time to see how they change and publish a chart of these numbers (the options contract’s trading history will also be charted). If the covered call contract expires worthless, the premium will represent a boost of 1.30% of additional return to the investor, or 52.88% on an annualized basis, which we refer to as YieldBoost.
The implied volatility in the example put contract is 32%, while the implied volatility in the example call contract is 35%.
Meanwhile, we calculate the actual trailing 12-month volatility (considering the last 251 trading days’ closing values as well as today’s price of $34.51) to be 32%. For more bid and call option contracts worth watching, visit StockOptionsChannel.com.
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Also see:
• Fiserv RSI
• PDP Options Chain
• Institutional holders of UDOW
The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.