Investors closely monitoring Herbalife Nutrition Ltd. (HLF) noticed new options beginning to trade at the end of 2018, set to expire in August of this year. When it comes to the price that an option buyer is willing to pay, one of the key data points that goes into it is time value. In this case, having a 228-day expiration date means that the new trading contracts offer a possible opportunity for sellers of puts and of calls to achieve a higher premium, which would otherwise be available for contracts with a closer expiration. The YieldBoost formula of Stock Options Channel has examined the option chain of HLF for new contracts and identified a put and a call contract that could be of particular interest to investors.
On the call side
The call contract, which is at the $60 strike price, has a bid currently of $5.15. If an investor were to purchase shares of Herbalife stock at the current price level of $58.56 per share and then sell-to-open that call contract, they would be committing to selling the stock at $60. If the stock is called away at expiration in August 2019, the call seller collects the premium and earns an 11.25% return on investment. However, if Herbalife Nutrition shares soar, they risk leaving substantial upside on the table. This means that examining the company’s trailing 12-month trading history and analyzing its business fundamentals are important.
The $60 strike means an approximate 2% premium to the stock’s trading price. Which also means that the call contract could expire worthless. In the event that the call contract expires worthless, the investor would retain both the shares of HLF stock and the premium collected. The odds of the contract expiring worthless are at 50% according to analytical data. The Stock Options Channel will continue to track the odds and publish a chart with the respective numbers, allowing for an analysis of the changes that occur. If the call contract ends up expiring worthless, that means the premium would represent an 8.79% boost of return for the investor, or a 14.08% annualized return.
On the put side
The $57.50 strike price has a bid of $4.60. If an investor were to sell-to-open a put contract, they would be committing to purchase the Herbalife Nutrition stock at $57.50. However, they would also collect the premium, thus effectively reducing the cost of the shares to $52.90. This represents an alternative to paying $58.56 per share for investors who are already interested in purchasing shares. Since the $57.50 strike represents an approximate 2% discount to the trading price, there is also a chance that the put contract will expire without being exercised. The odds of that happening, according to analytical data, are at 59%. Stock Option Channel will continue to monitor those odds and see how they change over time. If the put contract expires worthless, then the premium would represent a return of 8% on the cash commitment, or a 12.81% annualized.
The implied volatility in the call contract is 32%, and the same is true for the put contract example. However, Stock Options Channel calculated the actual trailing 12-month volatility, taking into consideration the closing values for the previous 250 trading days and the current price of $58.56, and concluded it to be 26%. Stock Options Channel will continue to provide put and call options contract ideas that are of interest to investors.