While AI related stocks took a thrashing on the DeepSeek prospects yesterday, not all stocks suffered. Walmart had an impressive day during yesterday's market chaos and earned a spot as IBD's Stock of the Day as it broke out to a new high. Walmart stock also joined IBD's SwingTrader product.
The company has enhanced its e-commerce capabilities with analysts anticipating its online segment to become profitable within the next one to two years.
According to the IBD Stock Checkup, Walmart ranked No. 1 in its group and has a Composite Rating of 89, an EPS Rating of 84 and a Relative Strength Rating of 93.
Walmart is a dividend king, having raised its dividend for 51 consecutive years and is an attractive candidate for income investors. Using options, there are ways to increase this yield even more.
Covered Call On Walmart Stock
A covered call strategy is one way to slightly reduce the risk on a long stock position while also generating some premium. The catch is that upside is limited above the covered call strike.
Let's look at how a covered call trade on Walmart might take shape.
Buying 100 shares of Walmart cost around $9,760 this morning.
A Feb. 21, 100-strike call option traded around 1.90, generating $190 in premium per contract.
Selling the call option immediately generates an income of 2% in under one month, equaling around 29% annualized.
According to the IBD Stock Checkup, Walmart ranked No. 1 in its group and has a Composite Rating of 89, an EPS Rating of 84 and a Relative Strength Rating of 93.
If Walmart stock closes above 100 on the expiration date, the shares will be called away at 100. Not a bad profit in such a short time with a total of $430 (a $240 gain on the shares plus the $190 option premium received).
Analyzing The Trade
That equates to a 4.7% return in just a few weeks, which is nearly 69% on an annualized basis.
And if Walmart stays below 100? The investor can continue selling call options until the shares get called away, pocketing a nice extra "dividend" each month.
Of course, the risk with the trade is that Walmart stock might drop. That could wipe out any gains made from selling calls. Still, the extra premium would help offset some of the loss. Having that risk mitigation comes with an opportunity cost. If Walmart skyrockets, your profits are capped.
Covered calls can be an effective strategy for generating income, managing downside risk, and reducing the effective purchase price of a stock.
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
