August Options Trade on Ferrari (NYSE:RACE) Stock
Investors in Ferrari (NYSE:RACE) saw new options begin trading this week, for 17 August expiration.
One of the Key data points that goes into the price an option buyer is willing to pay, is the time value, so with 226 days until expiration the newly trading contracts represent a possible opportunity for sellers of puts or calls to achieve a higher premium than would be available for the contracts with a closer expiration.
HeffX-LTN analysts looked up and down the RACE options chain for the new 17 August contracts and an picked a Put and a Call contract as an example.
The Put contract at the $100.00 strike price has a current bid of 5.50. Meaning if an investor was to sell-to-open that Put contract, they are committing to purchase the stock at 100.00, but will also collect the premium, putting the cost basis of the shares at 94.50. To an investor already interested in purchasing shares of RACE, that could represent an attractive alternative to paying 112.13/share today.
Because the 100.00 strike represents an approximate 12% 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 78%.
Should the contract expire worthless, the premium would represent about a 6.0% return on the cash commitment, or 9.0% annualized.
Below is a chart showing the trailing 12 month trading history for Ferrari, and highlighting in Green where the 100.00 strike is located relative to that history at the beginning of Y 2018:
Turning to the Call side of the option chain, the call contract at the 110.00 strike price had a bid of 7.70. If a player purchased shares of Ferrari stock at the current price level of 112.13/share, and then sell-to-open that Call contract as a “covered call,” they are committing to sell the stock at about 116.00.
Considering the call seller will also collect the premium, that would drive a total return (excluding dividends) of about 12% if the stock gets called away at the 17 August expiration.
Of course, a lot of upside could potentially be left on the table if Ferrari shares soar as I expect they will, which is why looking at the trailing 12 month trading history for Ferrari , as well as studying the business fundamentals becomes really important. Below is a chart showing RACE’s trailing 12 month trading history, with the 110.00 strike highlighted in Red at the beginning of this year.
Considering the fact that 110.00 strike represents an approximate 2 discount to the current trading price of the stock (in other words it is in-the-money by that percentage), there is also the possibility that the covered Call contract might 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 40%.
Should the covered Call contract expire worthless, the premium would represent a 9.20% boost of extra return to the investor, or 13.6% annualized.
The implied volatility in the Put contract example is 35%, while the implied volatility in the Call contract example is 33%.
If you calculate the actual trailing 12 month volatility (considering the last 257 trading day closing values as well as Friday’s price of 112.13 (+5.15 on the week) to be 25%.
HeffX-LTN does not recommend civilian, not professional investor speculation in stock options.
|NYSE:RACE||112.13||5 January 2018||0.82||112.74||113.02||112.03||408,100|
|HeffX-LTN Analysis for RACE:||Overall||Short||Intermediate||Long|
|Neutral (0.05)||Neutral (0.18)||Neutral (0.19)||Neutral (-0.22)|
Have a terrific weekend.