Let the bloodbath begin.
As I write this 2o minutes or so before the markets open, the S&P 500 futures are down 3.8% and likely to hit 4% by the open. It’s a freefall like we haven’t seen in some time.
The president could have avoided a correction if the Trump administration had laid out a coherent strategy for its global trading partners, explaining that over the four years of its administration, it would move as much manufacturing back to the U.S. as possible using negotiation and tariffs where warranted.
Instead, it has chosen blunt force through reciprocal tariffs, and American investors and consumers will pay the price. It’s hard not to consider the bull market dead.
However, my commentary today concerns unusual options activity; given the markets will be excessively volatile, I’ll look at three stocks from Wednesday’s trading that I think are good long-term holds to use protective collars to reduce your downside should you already own the stock.
Here’s hoping today’s action isn’t as bad as it looks pre-market.
Scotts Miracle-Gro (SMG)
It's springtime. That’s one of Scott's Miracle-Gro's (SMG) busiest times of the year, if not the busiest. Whether you like the tariffs or not, your lawn and garden care needs won’t go away, especially if you want to sell your home in the next few months.
The company hasn’t had an easy time recently due to some cannabis bets going wrong. However, its core business remains solid, and it appears ready to start growing again.
From the beginning of 2023 through today, its share price has essentially moved sideways, interrupted by the occasional move higher, only to give back the gains. Over the past five years, its shares have lost 45% of their value.
Loyal investors have not been rewarded. That could change.
Its Q1 2025 results were better than expected. The top-line sales were $416.8 million, 1.6% higher than a year ago and 6.3% higher than Wall Street’s estimate. Meanwhile, its adjusted net loss was $51.0 million during the first quarter, 38% less than a year ago, and on a per-share basis, 1.2% better than the consensus estimate.
More importantly, its U.S. Consumer business (82% of sales) saw revenues increase by 11% in the quarter, with a 165% increase in segment profit, moving from a loss to a profit. In addition, its gross margin was 24.0%, 10.3 percentage points higher than a year earlier.
The trade war won’t help, but its business appears to be getting stronger. At the midpoint of its guidance, 2025 adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) will be $580 million, higher than it’s been since 2021.
SMG had one unusually active option on Wednesday with a Vol/OI ratio of 33.99, the 8th-highest on the day.
Based on the June 20 DTE, here is my suggested protective collar, which involves already owning the stock, selling a call (covered) and buying a put (protective).
Here’s the covered call. In this market, it’s unlikely for its share price to hit $62.50 in the next 78 days, so you’d pocket $155 for an annualized return of 84.5%.
Here’s the protective put.
In this instance, your maximum loss is the net debit of $330, so your net cost for the protective collar is $175 [$330 net debit - $155 premium].
Walmart (WMT)
While Walmart (WMT) will likely face challenges with the global reciprocal tariffs, if anyone can meet the task, it’s the world’s largest retailer. Its shares opened down nearly 4% but have since recovered most of those losses.
The company is pressuring its Chinese suppliers to drop prices to offset Trump’s tariffs. It is looking for 10% price cuts for every new round of tariffs. The Chinese government is unhappy about it, but if anyone can influence these cuts, it’s Walmart.
In the long term, Walmart remains an excellent stock to own. Of the 37 analysts covering its stock, 34 rate it a Buy (4.73 out of 5), with a $109.57 target price, nearly 30% higher than its current price.
In yesterday’s trading, it had eight unusually active options with six calls and two puts. Here’s the unusually active call I’ve zoned in on.
Based on the $93 strike, I’d consider the protective collar.
In this instance, your net debit is reasonable, at $0.37 [$0.92 bid price - $1.29 ask price], while your maximum loss is $2.25, and your maximum profit is $4.25, with a profit probability of 47.6%.
Royal Caribbean (RCL)
Royal Caribbean (RCL) only had one unusually active option yesterday, and it was a put option deep OTM (out of the money).
That doesn’t provide downside protection. However, it wouldn’t be bad for a cash-secured put, where you’re trying to generate some income while waiting for a better entry point.
The annual return of 22.6% isn’t massive, but if you’re like me and believe that Royal Caribbean is the best cruise stock to own, this is an excellent combination of income generation and time decay.
In the meantime, here’s a potential protective collar with a more appropriate strike price for the put.
The $185 put is just one strike below the current share price, while the call is three strikes higher. The net credit of $495 is reasonable, while the profit probability of 44.7% is halfway between the $195 call and $230 call.
By doing the protective collar, you lower your cost by $705 but provide yourself with the same downside protection as if you merely bought the $185 put.
Every little bit counts.
Note: As I write this at 11:25 EST, the S&P 500 is down 4.06%, as expected. All the prices I’ve just discussed will have all changed as a result.
