Barron's - USA (2021-03-01)

March1,2021 BARRON’S M5

THE STRIKING PRICE

The weakness in Walmart stock is an opportunity

to sell upside calls, and to positionto keep the call

premiumshould the stock remain under pressure.

2 Options Strategies

To Play Walmart Stock

W

hen market conditions

change, reconsider your

strategies.

Stocks might come under

pressure, and sector leadership might be

rotating from technology stocks to those

that could benefit from an economic re-

opening. That creates opportunities.

If you think of the investments in your

portfolio as a collection of companies, not

stocks, the rotation is an opportunity to use

options to offset some of the weakness in

stocks you own—or to position to buy stocks

at more attractive prices. This is true even as

the market begins to worry about whiffs of

inflation and rising bond yields.

We often favor “risk reversals”—selling

put options and buying call options with

higher strike prices and similar expira-

tions—to buy stocks lower and ride them

higher. But the on-again, off-again market

weakness now seems ripe for selling calls on

battered stocks to create added income.

Conditions also seem ripe for ”short

strangles,” which entail selling calls and

puts on stocks. The approach expresses a

view that stocks may be rangebound for a

bit, and a willingness to buy quality names

on weakness.

ConsiderWalmart(ticker: WMT),

which has an aggressive grip on bricks-

and-mortar retail and a growing grip on

e-commerce. That’s unlikely to change even

though the stock is now sharply trailing the

S&P 500 index this year thanks to a disap-

pointing fourth-quarter earnings report

and some sentiment shifts. A muted out-

look—and Walmart’s decision to give

425,000 employees raises to $13 to $19 an

hour—didn’t help either.

The stock set a 52-week high in the fall

around $153 and has since edged lower. The

earnings report pushed the stock down to

about $140, and it has since weakened

more. The drop should largely be ignored

by long-term investors.

The weakness in the stock presents an

opportunity to sell upside calls, and to posi-

tion to keep the call premium should the

stock remain under pressure. This strategy

can enhance investment returns, and it

works for anyone who owns Walmart stock

or wants to buy the stock.

With the stock around $130, investors

could collect about $1.40 for selling the

April $140 call. This call was selected on

the belief that the stock will remain under

pressure and that shares will have trouble

advancing through that price point before

April options expire. If that proves true,

investors can keep the call premium, which

compares favorably with Walmart’s $2.16

annual dividend.

Investors who want to buy the stock—

and who previously held off because Wal-

mart had advanced so strongly for so

long—can consider a covered short stran-

gle. To initiate, an investor could buy stock,

and sell the April $140 call and the April

$125 put for $2.50. The strategy expresses a

view that the stock remains below $140 for

about two months, and a willingness to buy

more stock at lower prices.

If Walmart’s stock is above the $140

strike price at expiration in either strategy,

investors can sell Walmart’s stock at an

effective price of $141.40. During the past

52 weeks, Walmart stock has ranged from

$102 to $153.66. The stock is down about

10% this year, compared with a 2% gain for

the S&P 500.

Should investors not want to sell the

stock, they can simply cover the call or ad-

just the position within the options market.

The “roll” would seek to buy back the short

call and replace it with another short call at

a higher strike price and a more distant

expiration. Ideally, the roll would be exe-

cuted at a credit or the same price. The

same footwork applies to the short put part

of the short strangle.

Of course, there are risks to selling puts

and calls. Stock prices could surge or

weaken more than expected. But investors

can make lemonade when Mr. Market gives

you lemons.B

By Steven M. Sears

Equity Options

CBOE VOLATILITY INDEX

VIX Close VIX Futures

10

30

50

70

90

AMJ J ASOND JF

Daily Values Source: CBOE

THE EQUITY-ONLY PUT-CALL RATIO

Put-Call Ratio S&P 500 Index

30

55

80

105

130

155

180

205

230

255

280

305

330

MAMJ J ASOND JF

Source: McMillan Analysis Corp.

SPX SKEW

Implied volatility %

8

9

10

11

12

13

14

15

16%

MAMJ J ASOND JF

Source: Credit Suisse Equity Derivatives Strategy

NDX SKEW

Implied volatility %

7

8

9

10

11

12

13

14

15

16%

MAMJ J ASOND JF

Source: Credit Suisse Equity Derivatives Strategy

Skew indicates whether the options market expects a stock-market advance or decline. It measures the difference

between the implied volatility of puts and calls that are 10% out of the money and expire in three months. Higher

readings are bearish.

Week'sMostActive

Company Symbol TotVol Calls Puts AvgTotVol IV%ile Ratio

Timken Steel TMST 12316 8482 3834 232 97 53.1

Frank's International FI 7896 5601 2295 152 91 51.9

Alpha Metallurgical Resources AMR^4417172424511630 38.1

Energy Recovery ERII 21820 20944 876 604 99 36.1

Axogen AXGN 2028 1973 55 72 38 28.2

Kirby KEX^181181780231680885 22.4

ChromaDex CDXC^1433773566981752100 19.1

CBRE CBRE 34539 33237 1302 2456 76 14.1

Magnolia Oil & Gas MGY 14429 3053 11376 1028 74 14.0

Spark Energy SPKE^5710772493854061 10.6

Ebix EBIX 24667 16239 8428 2356 98 10.5

Oshkosh OSK 27634 23187 4447 2636 95 10.5

Corepoint Lodging CPLG^175451749649177269 9.9

Cooper Tire CTB 7924 3541 4383 932 0 8.5

Mammoth Energy Services TUSK 6339 6265 74 780 95 8.1

Forest Road Acquisition FRX^156644126025306191993699 7.9

Vedanta VEDL 9410 8912 498 1244 76 7.6

R. R. Donnelly & Sons RRD 15843 13879 1964 2100 85 7.5

NY Communnity Bancorp NYCB 29116 27311 1805 3916 87 7.4

Bank of Nova Scotia BNS^242261068513541341253 7.1

Thistableofthemostactiveoptionsthisweek,ascomparedtoaverageweeklyactivity–notjustrawvolume.Theideaisthatthe

unusuallyheavytradingintheseoptionsmightbeapredictorofcorporateactivity–takeovers,earningssurprises,earningspre-

announcements,biotechFDAhearingsordrugtrialresultannouncements,andsoforth.Dividendarbitragehasbeeneliminated.In

short,thislistattemptstoidentifywhereheavyspeculationistakingplace. Theseoptionsarelikelytobeexpensiveincomparisonto

theirusualpricinglevels.Furthermore,manyofthesesituationsmayberumor-driven.Mostrumorsdonotprovetobetrue,soone

shouldbeawareoftheseincreasedrisksiftradinginthesenames

RatioistheTotVoldividedbyAvgTotVol.IV%ileishowexpensivetheoptionsareonascalefrom0to100.

Source:McMillanAnalysis