Investors in Ferrari NV (NYSE:RACE) saw new options become available this week, for the 20 November expiration.
1 of the Key inputs that goes into the price an option buyer is willing to pay, is the time value, so with 239 days until expiration the newly available contracts represent a possible opportunity for sellers of uts or Calls to achieve a higher premium than would be available for the contracts with a closer expiration.
At HeffX our DOT (dedicated options trader) looked up and down the RACE options chain for the new 20 November contracts and identified 1 Put and 1 Call contract of particular interest.
The Put contract at the 145.00 strike price has a current bid of 16.80. If an investor was to sell-to-open that Put contract, they are committing to purchase the stock at 145.00, but will also collect the premium, putting the cost basis of the shares at 128.20 before broker commissions.
To an investor already interested in purchasing shares of RACE, that could represent an attractive alternative to paying 157.18/share Thursday.
Because the 145.00 strike represents an approximate 7.5% discount to the current trading price of the stock in other words it is out-of-the-money by that percentage, there is also the possibility that the put contract would expire worthless. The current analytical data suggest the current odds of that happening are 63%.
Should the contract expire worthless, the premium would represent a 11.60% return on the cash commitment, or 17.70% annualized, aka yield boost.
Below is a chart showing the trailing twelve month trading history for Ferrari, and highlighting in Green where the 145.00 strike is located relative to that history:
Turning to the calls side of the option chain, the call contract at the 155.00 strike price has a current bid of 17.60. If an investor was to purchase shares of RACE stock at the current price level of $157.18/share, and then sell-to-open that call contract as a “covered call,” they are committing to sell the stock at 155.00.
Considering the call seller will also collect the premium, that would drive a total return ex dividends of 13.0% if the stock gets Called away at the 20 November expiration, before broker commissions.
Of course, a lot of Northside could potentially be left on the table if RACE shares soar, which is why looking at the trailing 12 month trading history for Ferrari, as well as studying the business fundamentals becomes important.
Below is a chart showing RACE’s trailing 12 month trading history, with the 155.00 strike highlighted in Red:
Considering the fact that the 155.00 strike represents an approximate .09% premium to the current trading price of the stock, in other words it is out-of-the-money by that percentage, there is also the possibility that the covered Call contract will expire worthless, in which case the investor would keep both their shares of stock and the premium collected.
The current analytical data suggest the current odds of that happening are 49%. Should the covered Call contract expire worthless, the premium would represent a 11.55% boost of extra return to the investor, or 17.85% annualized
The implied volatility in the Put contract example is 50%, while the implied volatility in the Call contract example is 45%.
The actual trailing 12 month volatility (considering the last 252 trading day closing values as well as today’s price of 157.18 to be 36.5%.
Ferrari finished at 158.18, +3.12 Thursday in NY, and shares were raised to Buy from Hold at HSBC.
Ferrari will continue to create value in the long term. Ferrari is a quality 1st long term luxury products investment, and I have called it at it at 200+/share long term, adjusting it to 200/share short term (after the virus) and siding with BAML to 230 long term for now.
Have a healthy day, stay home!