Happy Friday, everyone.
So far this week, the S&P 500 is down 2.5% heading into the final trading day. The big Trump push is fading fast. Since Trump was elected on Nov. 5, the index is up 1.4%, an annualized rate of 4.2%. If that holds, it would be the 10th worst performance since 2000.
On tap for today, the Bureau of Economic Analysis (BEA) releases the January core PCE (personal consumption expenditures) price index, the Federal Reserve’s preferred price gauge for inflation. It influences the Fed’s decision about interest rates.
Economists expect the annualized rate to be 2.6%, 20 basis points less than a year ago, with a 0.3% gain over December. As I write this before the markets open, S&P futures are mildly positive. We shall see what the day brings.
In the meantime, in yesterday’s unusual options activity, struggling drug store chain Walgreens Boots Alliance (WBA) had five unusually active call options, three expiring in 1,023 days.
While I would say that WBA isn’t a stock worth owning for risk-averse investors, aggressive investors might want to take a LEAP of faith.
Have an excellent weekend.
What Are LEAPS and Why Should I Care?
The answer to the first part of the sub-heading is much easier than the second.
LEAPS (Long-Term Equity Anticipation Securities) are options whose expiration date is one year or longer. However, they generally have a DTE (days to expiration) around 2.5 years. According to Barchart’s Senior Market Strategist, John Rowland, about a third of listed stocks have LEAPs. You’re more likely to see them with ETFs and Index Options.
Rowland produced an excellent beginner’s guide to LEAPs in June 2024. I recommend it for anyone interested in longer-duration options.
Rowland points out that you can use LEAPS as a substitute for owning the stock and using the cash savings to invest in a CD or Treasury bill. Given the economic uncertainty of Trump’s tariffs on the economy, it would be a good way to have your cake and eat it too.
Furthermore, as Rowland points out, LEAPS have “a low rate of time decay and relatively stable deltas.”
His presentation makes me rethink my belief that the three unusually active WBA calls I’ll discuss are only suitable for aggressive investors. Risk-averse investors could ratchet their risk profile by utilizing LEAPS and investing the cash saved into risk-free securities—the best of both worlds in an uncertain environment.
That’s why you should care about them.
The LEAPS in Question
As I said, three WBA calls were expiring in 1,023 days.
As you can see from above, we have three strike prices: $10, $12.50, and $15, with ask prices varying from $3.00 to $5.00.All three had Vol/OI ratios over 10, which indicates reasonable investor interest.
Yesterday’s options volume was 121,799, almost double its 30-day average. Meanwhile, its share volume was about three-quarters of its 30-day average. Both yesterday’s put/call volume and put/call open interest were bullish at 0.47 and 0.56, respectively. Except on a few occasions over the past three months, investors have remained quite bullish about its options, even though the company has a long turnaround ahead.
Is There Any Good WBA News to Hang Your Hat On?
Without getting too far into the fundamentals, the share price has emerged from a bottom that lasted from August through December.
Its shares have increased by over 20% through the first two months of 2025, albeit with significant volatility. They shot up to $13 in January before falling below $10 earlier in February, only to rebound again.
A look at the five-year chart gives you a better idea of the bottom.
I’m not suggesting it will return to $55, where it traded in January 2022. It doesn’t have to for you to do well on this bet. If it reaches $30 by expiration, you've doubled your money. Plus, if it reaches $30 by late 2027, it could be worth holding for the long term. Indeed, a $19 move over the next 34 months would indicate investors have returned to the stock.
I haven’t paid any attention to retail pharmacy stocks in the past 12-18 months. So, I’m not going to pretend I’m an expert. However, the two higher moves in 2025 were preceded by positive news stories.
The mid-January increase was due to a reasonably robust Q1 2025 earnings report. Sales rose by 6.9%, excluding currency, on growth from all three segments of its business. Regarding income, its International and U.S. Healthcare segments increased their adjusted operating income, while U.S. Retail’s adjusted operating income decreased by 36.5% to $441 million. This was due to lower sales in front-of-the-store retail, offset by healthy gains in pharmacy.
As Walgreens continues to optimize its retail footprint--in December, it was reported that Sycamore Partners was considering an offer to buy Boots, its UK subsidiary, for an estimated $10 billion--and secure reimbursement models for its U.S. Healthcare business that will lead to greater profitability.
It’s a start.
When the company’s stock moved higher in February, it suspended its quarterly dividend, which didn’t surprise investors. Still, it affirmed its commitment to disciplined capital allocation decisions. In 2023 and 2022, when the quarterly dividend was still 48 cents, it paid out $1.66 billion to shareholders each year. Now, it has about $800 million and can invest elsewhere.
That’s a good thing.
The LEAP of Faith
Walgreens stock closed Thursday at $11.23. Let’s assume you are super-bullish on the turnaround—most analysts are not—and want to buy 500 shares for $5,615.
As my Barchart colleague pointed out, you can buy five LEAPs for between $1,500 and $2,500 depending on the ask price. You take between $3,115 and $4,115 and buy a 3-year T-bill yielding 4%. That’s guaranteed. Add in the interest and based on the midpoint, you’d have approximately $4,066 at maturity, less taxes on the interest if in a taxable account.
Your net loss exposure wouldn’t be much more than $1,000 over the next 34 months. While it’s a leap of faith, the risk/reward proposition is reasonable. The ITM (in the money) probability for the $15, 12.50, and $10 calls are 36.25%, 45.14%, and 54.26%, respectively.
If you choose the highest ITM probability, your outlay for five calls would be $2,500 based on this example, $3,115 invested at 4% guaranteed over the next 36 months. However, if you choose the $15 strike, your outlay is only $1,500, with $4,115 invested at 4%.
Based on all three calls’ deltas, you could double your money by selling before expiration if the $15 call appreciates by $7.30 (65.0%), the $12.50 by $6.80 (60.6%), and the $10 by $7.77 (69.2%).
Of course, in every instance, if the stock appreciates by the amounts above, you would be well in the money. The $1o call is already there and the $12.50 is only 11% away.
If you think it can reach $30 by December 2027, the $15 call is the bet. Otherwise, I’d go with the $10 call because it has the highest ITM probability.
