Investors in Xinyuan Real Estate Co Ltd (XIN) saw new options become available this week, for the April 2014 expiration. One of the key inputs that goes into the price an option buyer is willing to pay, is the time value, so with 242 days until expiration the newly available contracts represent a potential 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 XIN options chain for the new April 2014 contracts and identified one put and one call contract of particular interest.
The put contract at the $5.00 strike price has a current bid of 50 cents. If an investor was to sell-to-open that put contract, they are committing to purchase the stock at $5.00, but will also collect the premium, putting the cost basis of the shares at $4.50 (before broker commissions). To an investor already interested in purchasing shares of XIN, that could represent an attractive alternative to paying $5.88/share today.
Because the $5.00 strike represents an approximate 15% 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 71%. 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 10.00% return on the cash commitment, or 15.08% annualized — at Stock Options Channel we call this the YieldBoost.
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