How To Buy WMT For A 6% Discount, Or Achieve An 18% Annual Return

Selling cash secured puts on stocks an investor is happy to take ownership of is a great way to generate some extra income. A cash-secured put involves writing an at-the-money or out-of-the-money put option and simultaneously setting aside enough cash to buy the stock. The goal is to either have the put expire worthless and keep the premium, or to be assigned and acquire the stock below the current price. It’s important that anyone selling puts understands that they may be assigned 100 shares at the strike price.

Why Trade Cash Secured Puts?

Selling cash secured puts is a bullish trade but slightly less bullish than outright stock ownership. If the investor was strongly bullish, they would prefer to look at strategies like a long call or a bull call spread. Investors would sell a put on a stock they think will stay flat, rise slightly, or at worst not drop too much.

Cash secured put sellers set aside enough capital to purchase the shares and are happy to take ownership of the stock if called upon to do so by the put buyer. Naked put sellers, on the other hand, have no intention of taking ownership of the stock and are purely looking to generate premium from option selling strategies.

The more bullish the cash secure put investor is, the closer they should sell the put to the current stock price. This will generate the most amount of premium and also increase the chances of the put being assigned. Selling deep-out-of-the-money puts generates the smallest amount of premium and is less likely to see the put assigned.

WMT Cash Secure Put Example

Walmart (WMT) is a blue-chip stock and is also one of the most oversold stocks in the Dow Jones Industrial Average according to the RSI reading. WMT dropped 7.51% today after cutting their profit outlook on inflation concerns. The stock is currently showing a dividend yield of 1.69%.

Earlier today, with WMT trading at $121.98, the October put option with a strike price of 120 was trading around $4.95. Traders selling this put would receive $495 in option premium. In return for receiving this premium, they have an obligation to buy 100 shares of WMT for $120. By October 21, if WMT is trading for $110, or $100, or even $60, the put seller still has to buy 100 shares at $120.

But, if WMT is trading above $120, the put option expires worthless, and the trader keeps the $495 option premium. The net capital at risk is equal to the strike price of 120, less the 4.95 in option premium. So, if assigned, the net cost basis will be $115.05. That’s not bad for a stock currently trading at $121.98. That’s a 5.68% discount from the price it was trading today and 28.44% below the 52-week high.

If WMT stays above $120, the return on capital is:

$495 / $11,505 = 4.30% in 86 days, which works out to 18.26% annualized.

Either the put seller achieves an 18.26% annualized return, or gets to buy a quality stock for a 5.68% discount. You can find other ideas like this using the Naked Put Screener. 

Company Details

The Barchart Technical Opinion rating is an 80% Sell with a strengthening short term outlook on maintaining the current direction. 

Of the 24 analysts covering WMT, 14 have a Strong Buy rating, 3 have a Moderate Buy and 7 have a Hold rating.

WMT currently has an IV Percentile of 98% and an IV Rank of 80.22%.

Walmart Inc. helps people around the world save money and live better by providing the opportunity to shop in both retail stores and through eCommerce, and to access its other service offerings. Through innovation, it strives to continuously improve a customer-centric experience that seamlessly integrates its eCommerce and retail stores in an omni-channel offering that saves time for customers. By leading on price, it earns the trust of customers every day by providing a broad assortment of quality merchandise and services at everyday low prices (EDLP). EDLP is the company's pricing philosophy under which it prices items at a low price every day. Everyday low cost (EDLC) is the company's commitment to control expenses so its cost savings can be passed along to customers. It has 3 reportable segments: Walmart U.S., Walmart International and Sam's Club. It maintains principal offices in Bentonville, Arkansas.

Summary

While this type of strategy requires a lot of capital, it is a great way to generate an income from stocks you want to own. If you end up being assigned, you can sit back and collect the nice 1.69% dividend on offer and start selling covered calls while waiting for the stock to recover. You can do this on other stocks as well, but remember to start small until you understand a bit more about how this all works.

Risk averse traders might consider buying an out-of-the-money put to protect the downside. 

Please remember that options are risky, and investors can lose 100% of their investment. 

This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.

*Disclaimer: On the date of publication, Steven Baster did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. Data as of after-hours, July 26, 2022.

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