Strategic Covered Call Option Guide for Walmart Investors

What is happening with Walmart?

Walmart shares are trading near record highs, closing at $84.08 on Monday. The company’s performance is often seen as a key indicator of U.S. consumer financial health. Over the last 10 quarters, Walmart has surpassed earnings expectations eight times, met them once, and missed only once. Analysts are expecting Walmart to report Q3 revenue of $167.72 billion and earnings per share of 53 cents.

Analysts anticipate that Walmart’s valuation could increase with consistent earnings growth in the coming years. The company is showing strong U.S comparable sales, with both discretionary and consumable trends expected to remain steady. Its omni-channel investments are beginning to yield results and Q3 earnings could further reveal whether investments in e-commerce and order fulfilment continue to be beneficial. According to Walmart CEO Doug McMillion, key areas to watch include global e-commerce sales, and newer ventures such as marketplace, advertising and membership which are diversifying and contributing to Walmart’s profits and business model.

What can you do if you are long Walmart?

Investors who have a stake in Walmart and wish to earn some income while waiting for Walmart to reach the target price may consider selling call options on Walmart. This strategy allows investors to earn additional income from being long Walmart.

Illustration:

1. With Walmart’s stock price at $84.08 on 18 Nov 2024, selling a call option with a $90 strike price (if you are comfortable selling your Walmart shares at $90) for 3-days expiry will yield a total premium of $51.00 ($0.51 x 100 shares).
2. This gives an annualized yield of 72.8% (0.51/84.08) x (360/3).
3. If Walmart’s price stays below the strike price of $90 at expiry, the option will expire worthless, and the investor gets to keep the premium with no additional obligations.
4. If Walmart’s price rises above the strike price of $90 at expiry, the investor is obligated to sell 100 shares at $90.The investor still gets to keep the option premium, thereby achieving the effective selling price of $90 + option premium.

Note:

1. Please note options trade in lot sizes of 100 shares. When an investor sells 1 lot of call option, they are selling a call option on 100 shares.
2. Prudent investors typically sell covered calls only on part of their holdings and keep the upside open on the rest.
3. If the investor wishes to receive a higher premium, the investor could choose an option with a similar strike price and a longer expiry.
4. If the investor is only willing to sell the stock at a higher price but still want to receive a relatively similar premium, the investor could choose an option with a higher strike price and a longer expiry.

Advantages of covered calls

1. Generates passive income. Selling a covered call generates an income via premiums that can supplement the overall return of a portfolio.
2. Relatively low risk. As the risk of being short a call is covered with your stock position, trading options this way carries a relatively low level of risk.
3. No extra margin required to sell covered calls. As you hold the underlying stock for delivery, there is no extra margin required to sell the same number of covered calls at Saxo.

Risks of trading covered calls

1. Capping your stock’s upside potential. One key risk is the loss of opportunity to profit from your stock’s potential upside above the call option’s strike price.
2. Risk of using covered calls as a proxy for take profit orders: In the example above, it is possible that the stock trades well above $90 through the course of the option but on expiry falls back below $90. Without the option, the investor might have booked the profits at $90 but because the stock was covered by call options, the investor might have waited out until expiry.

Options are complex, high-risk products and require knowledge, investment experience and, in many applications, high risk acceptance. We recommend that before you invest in options, you inform yourself well about the operation and risks. In Saxo Capital Markets Risk Warning, you will find more information on leveraged products and the associated risks. Trading in financial instruments carries risk and may not be suitable for you. Please refer to Saxo Capital Markets’ full Disclaimer here.