Interesting AVA Put Options For November 21st

An analysis of Avista Corp (AVA) options highlights selling the $35.00 strike put for a 5-cent premium, offering an effective acquisition price of $34.95, a discount to the current $36.10 share price. This out-of-the-money contract, with a 60% probability of expiring worthless, provides a potential 0.81% annualized return on committed capital and notes a significant implied volatility of 31% compared to its 19% historical volatility.

Analysis

The analysis of Avista Corp (AVA) centers on a specific options strategy involving the sale of an out-of-the-money put contract with a $35.00 strike price. This strategy presents two potential outcomes for an investor: either generating a small yield or acquiring AVA shares at a discount to the current trading price of $36.10. Specifically, if the option is assigned, the investor purchases shares at an effective cost basis of $34.95 ($35.00 strike less the $0.05 premium). If the option expires worthless, which analytical data suggests has a 60% probability, the investor realizes a 0.14% return on the committed capital, annualizing to 0.81%. A critical data point is the significant divergence between the option's implied volatility of 31% and the stock's trailing twelve-month historical volatility of 19%. This suggests that options on AVA are currently pricing in more risk than has been historically realized, making option-selling strategies relatively more attractive due to the elevated premium.

Key Decisions for Investors

• For investors bullish on AVA, selling the $35.00 put contract can serve as a disciplined entry strategy, offering an opportunity to acquire shares at an effective price of $34.95, a discount to the current market price.
• Investors should recognize the notable spread between implied volatility (31%) and historical volatility (19%), as this indicates that option premiums are currently elevated, potentially favoring volatility-selling strategies.
• Despite the 60% chance of the option expiring worthless, investors must be prepared to honor the contract by purchasing AVA shares at $35.00 if the stock price declines below this level, and should therefore have sufficient capital allocated for this potential outcome.