Interesting ADP Put And Call Options For November 14th

The article outlines two options strategies for Automatic Data Processing (ADP) at its current $288.42 share price, demonstrating potential for yield enhancement or cost basis reduction. Selling an out-of-the-money $285.00 put for a $5.50 premium offers a 16.37% annualized YieldBoost with a 58% probability of expiring worthless, effectively reducing the purchase price to $279.50. Alternatively, a covered call strategy involving buying ADP and selling a $290.00 call for $7.30 premium could yield a 3.08% return by November 14th if shares are called away, or a 21.46% annualized YieldBoost with a 51% probability of expiring worthless, providing avenues for income generation or enhanced returns on existing positions.

Analysis

The article presents two distinct options strategies for Automatic Data Processing (ADP), currently trading at $288.42, aimed at either generating income or establishing a position at a reduced cost basis. The first strategy involves selling an out-of-the-money (OOTM) put with a $285.00 strike price for a $5.50 premium. This lowers the effective purchase price to $279.50 if assigned, representing an attractive entry point for interested investors. The contract has a 58% probability of expiring worthless, which would yield a 1.93% return on the cash commitment, equivalent to a 16.37% annualized rate. The second strategy is a covered call, involving the sale of a $290.00 strike call for a $7.30 premium against a long stock position. This generates a total return of 3.08% if the stock is called away by the November 14th expiration. The call has a 51% chance of expiring worthless, in which case the premium provides a 2.53% return boost, or a 21.46% annualized yield. A key observation is the divergence between the options' implied volatility (22% for the put, 25% for the call) and the stock's trailing twelve-month actual volatility of 19%, suggesting that options are currently pricing in a higher degree of expected price movement than has been historically observed, making premium-selling strategies relatively more attractive.

Key Decisions for Investors

• Investors bullish on ADP who are seeking a lower entry point could consider selling the $285.00 put to either acquire shares at an effective cost basis of $279.50 or to generate a 16.37% annualized yield if the option expires worthless.
• Current ADP shareholders with a neutral to moderately bullish outlook might implement a covered call by selling the $290.00 call, which offers a potential 21.46% annualized yield boost while accepting a capped total return of 3.08% if the stock is called away.
• Traders should note that the elevated implied volatility of 22%-25% compared to the 19% historical volatility suggests that option premiums are rich, making selling strategies like cash-secured puts and covered calls mathematically favorable at present.
• Before executing, investors must weigh the risk of a sharp stock decline, which would obligate the put seller to buy shares above the market price, against the risk of a strong rally, which would cap the upside for the covered call seller.