From Nasdaq, Inc.:

Investors in The Materials Select Sector SPDR Fund (Symbol: XLF) saw new options become available today, for the May 17th expiration. One of the key inputs that goes into the price an option buyer is willing to pay, is the time value, so with 128 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.

The put contract at the $37.00 strike price has a current bid of 79 cents. If an investor was to sell-to-open that put contract, they are committing to purchase the stock at $37.00, but will also collect the premium, putting the cost basis of the shares at $36.21 (before broker commissions).

Because the $37.00 strike represents an approximate 2% 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.

Turning to the calls side of the option chain, the call contract at the $38.00 strike price has a current bid of $1.44. If an investor was to purchase shares of XLF stock at the current price level of $37.66/share, and then sell-to-open that call contract as a “covered call,” they are committing to sell the stock at $38.00. Considering the call seller will also collect the premium, that would drive a total return (excluding dividends, if any) of 4.73% if the stock gets called away at the May 17th expiration (before broker commissions).

Considering the fact that the $38.00 strike represents an approximate 1% 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 would expire worthless, in which case the investor would keep both their shares of stock and the premium collected.

We calculate the actual trailing twelve month volatility (considering the last 251 trading day closing values as well as today’s price of $37.66) to be 16%.



Read more: XLF May 17th Options Begin Trading