Earnings season isn't quite over yet and Walmart is set to report earnings on Thursday before the opening bell. The options market is pricing in a 5.5% move in either direction. Using that information, we can set up a cash-secured put on Walmart stock that will either get us some quick income or shares at a discounted price.
What Is A Cash-Secured Put
A cash-secured put involves selling an at-the-money or out-of-the-money put option. You simultaneously set aside enough cash to buy the stock.
The goal is to either have the put expire worthless and keep the premium, or to take assignment and acquire the stock below the current price.
They are very similar to a covered call and are quite easy to understand once you know the basics.
It's important that anyone selling puts understands that they may be assigned 100 shares at the strike price.
With earnings coming up on Walmart stock, the implied volatility is on the higher side relative to its usual. As of today, it's in the 65th percentile. When option have higher implied volatility compared to usual, selling premium is the general preference for options traders.
Setting Up The Trade On Walmart Stock
For Walmart stock, a trader selling the Aug. 16 put with a strike price of 66 generated around $115 in premium per contract.
The put has a delta of 35, which means there is an estimated 65% chance that it will expire worthless. For reference, WMT stock has moved higher following four of the last six earnings releases. Only one of the last six has seen a bigger than expected move on the downside. That also factors into the increased likelihood of the option expiring worthless.
As the put seller, you have the obligation to purchase 100 shares of WMT stock at 66 if called upon to do so by the put buyer.
The break-even price for the trade can be calculated by taking the strike price less the premium received which in this case gives a break-even price of 64.85. That's 4.2% below the current price.
If the stock stays above 66 at expiry, the put option expires worthless. It leaves the trader with a healthy 1.8% return on capital at risk in just under a week's time. That's not a bad annualized return at over 160%.
Trade Risks
The main risk with the trade is similar to outright stock ownership. If Walmart stock falls significantly, the trade will suffer a loss. However, the loss is partially offset by the premium received for selling the put.
Cash-secured puts are a fantastic way to generate a return on stocks the trader is happy to own.
With this example, the trader either generates a 1.8% return in a few days, or they get to purchase Walmart at a reasonable discount to the current price.
If WMT stock trades below 66 and the put gets assigned, investors can then sell covered calls against the position to generate further income.
According to the IBD Stock Checkup, WMT stock is ranked No. 1 in its industry group. It has a Composite Rating of 91, an EPS Rating of 87 and a Relative Strength Rating of 89.
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.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ
