Investors in First American Financial Corp (Symbol: FAF) saw new options become available this week, for the October 21st 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 240 days until expiration the newly available 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. At Stock Options Channel , our YieldBoost formula has looked up and down the FAF options chain for the new October 21st contracts and identified the following put contract of particular interest.
The put contract at the $35.00 strike price has a current bid of 60 cents. If an investor was to sell-to-open that put contract, they are committing to purchase the stock at $35.00, but will also collect the premium, putting the cost basis of the shares at $34.40 (before broker commissions). To an investor already interested in purchasing shares of FAF, that could represent an attractive alternative to paying $36.78/share today.
Because the $35.00 strike represents an approximate 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 (including greeks and implied greeks) suggest the current odds of that happening are 61%. Stock Options Channel will track those odds over time to see how they change, publishing a chart of those numbers on our website under the contract detail page for this contract . Should the contract expire worthless, the premium would represent a 1.71% return on the cash commitment, or 2.61% annualized - at Stock Options Channel we call this the YieldBoost .
Below is a chart showing the trailing twelve month trading history for First American Financial Corp, and highlighting in green where the $35.00 strike is located relative to that history: The implied volatility in the put contract example above is 29%. Meanwhile, we calculate the actual trailing twelve month volatility (considering the last 253 trading day closing values as well as today's price of $36.78) to be 24%. For more put and call options contract ideas worth looking at, visit StockOptionsChannel.com.