“10% Trade” Opportunity with Wal-Mart (WMT)

[stextbox id=”info”]Please keep in mind that these “10% Trade” opportunities are for information purposes only. We’re not registered financial advisors and these aren’t specific trade recommendations for you as an individual. Each of our readers have different financial situations, risk tolerance, goals, time frames, etc. You should also be aware that some of the trade details (specifically stock prices and options premiums) are certain to change from the time we write about the opportunity to the time you read about it. So please don’t attempt to make this “10% Trade” yourself without first doing your own due diligence and research.[/stextbox]

The current sell-off in stocks is creating dozens of solid “10% Trade” opportunities with many of my favorite stocks.

One that I’m particularly interested in today is with Wal-Mart (WMT) — a World Dominating, Dividend Champion boasting 41 consecutive years of dividend growth.

Thanks to all the market volatility, the “King of Retail” has seen its share price pull back some 5.7% over the past five trading sessions alone.

WMT has pulled back

With this in mind, if you’ve been considering owning shares of this high-quality dividend growth stock, then right now looks like the best buying opportunity we’ve had since mid-August.

But instead of buying Wal-Mart at the market price, I think a “10% Trade” is a better option.

In short, it could offer us the opportunity to collect safe, double-digit income while waiting to buy shares at an even lower price than what they’re currently trading for.

Here’s how…

As I write, Wal-Mart is selling for $73.82 per share and the November 22, $72.50 puts are going for about $1.27 per share.

"10% Trade" with Wal-Mart (WMT)For the sake of simplicity, let’s say our “10% Trade” involves selling one of these puts. We’ll also exclude any trade commissions to help keep the math easy.

In short, there would only be two ways this trade could work out.

On one hand, we’d get to generate a 17.8% annualized yield from Wal-Mart without even owning the stock. That’s over six times the stock’s “regular” annual yield of 2.9%.

On the other hand, we’d get paid $127 in cash, immediately, for the opportunity to buy Wal-Mart at $72.50 per share (which is a 1.8% discount to what it’s currently selling for).

If you like safe double-digit income and the shot to own Wal-Mart at a discount to its already-depressed current price, then both of these options should be more compelling than simply buying the stock at the current market price.

Let’s take a closer look at each scenario…

[hana-code-insert name=’adsense-article’ /]Scenario 1: WMT falls below $72.50 by November 22
If Wal-Mart falls below $72.50 by November 22, we’ll be obligated to buy 100 shares at $72.50 per share. So we’ll need to set aside $7,250 for this trade.

In exchange for our agreement, we would be paid an instant $127 (100 shares X $1.27 per share).

This money would be deposited into our accounts immediately.

Taking this income into consideration, our cost-basis would drop to $71.23 per share ($72.50 – $1.27).

That’s a 3.5% discount to the $73.82 share price that Wal-Mart is selling for as I write. 

Considering how the stock has already pulled back roughly 5.7% over the past few days, the opportunity to buy shares at an ADDITIONAL 3.5% discount from here is compelling.

Scenario 2: WMT stays above $72.50 by November 22
If Wal-Mart stays above $72.50 by November 22, our put option contract will expire worthless and we won’t buy the stock.

However, we’ll have kept the $127 in income.

Taking that income into account, this works out to a 1.8% return on what our purchase obligation would have been ($1.27 / $72.50) in 36 days.

If we can repeat these results over the period of a year we could generate a 17.8% yield from Wal-Mart without even buying shares.

Like this setup? Here’s how we’d make the trade…
Sell to Open the November 22, $72.50 cash-secured puts on Wal-Mart (WMT). Set a limit price of $1.27. Since each option contract involves 100 shares, we’ll need to set aside $7,250 for every contract we sell. The trade lasts 36 days and offers us an opportunity to 1) capture a 17.8% annualized yield without even owning the stock, or 2) own shares at a cost-basis of $71.23 per share.

Potential Risks: When selling a put, the price of our underlying stock could drop below our cost-basis by expiration. If this happens, we’ll be obligated to buy shares at a price that is higher than what they’re trading for at the time we buy them. This is why we should ONLY consider selling a put on a stock we’d be happy owning at the strike price. It’s for this reason that I personally only make “10% Trades” with high-quality dividend growth stocks that appear to be trading at reasonable prices.

Greg Patrick

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