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Making Peace With Walmart Could Drive Gains In This Stock

Making Peace With Walmart Could Drive Gains In This Stock

Walmart is widely followed as an economic bellwether. Analysts scour the company’s data for clues about economic growth. That’s because the retailer is so large its fortunes do reveal insights into the economy.

Walmart’s size is also why when companies announce relationships with Walmart, their stocks can soar. Or, the opposite can happen when Walmart questions its relationship with a company. That happened to a financial services firm recently and a relief rally is creating opportunities for investors.

Extending the Deal Pushes the Stock Up

Analysts at TheStreet noted that Synchrony Financial (NYSE: SYF) surged after the company announced strong fourth-quarter earnings and an extension of its lucrative and long-standing partnership with Walmart Inc.’s (WMT) Sam Club.

SYF daily chart

Synchrony Financial is a consumer financial services company. The company provides a range of credit products through programs it has established with a group of national and regional retailers, local merchants, manufacturers, buying groups, industry associations and healthcare service providers.

In the most recent quarter, the company said it earned $783 million, or $1.09 a diluted share, in its fourth quarter, vs. $385 million, or 70 cents, a year earlier.

Net interest income increased 11% from the fourth quarter of 2017 to $4.3 billion, while loan receivables grew $11 billion, or 14%, from the fourth quarter of 2017 to $93 billion.

Separately, Synchrony announced an extension of its strategic partnership with Walmart’s Sam’s Club segment to continue offering club members enhanced financing options through Sam’s Club-branded credit cards.

As part of the extension, Synchrony will continue to manage and service the credit card programs for Sam’s Club members across the retailer’s nearly 600 clubs.

Synchrony also announced it reached an agreement on the sale of the Walmart loan portfolio currently serviced by Synchrony. The portfolio is expected to transfer late in the third quarter or early in the fourth quarter of 2019.

The company further announced that it has reached an agreement with Walmart to dismiss its lawsuit against Synchrony. Walmart in November filed a lawsuit in an Arkansas federal court that sought damages of at least $800 million against Synchrony for allegedly breaching their agreement for credit cards issued to Walmart’s shoppers.

“Obtaining certainty around the Walmart portfolio and a renewal on Sam’s Club is a great outcome for the company,” Synchrony CEO Margaret Keane said in a separate statement. “We look forward to continuing to deliver innovative products and excellent customer service to Sam’s Club members.”

That lawsuit had weighed on the stock and could explain part of the down trend in the stock.

SYF weekly chart

A Trade For Short Term Bulls

As with the ownership of any stock, buying SYF could require a significant amount of capital and exposes the investor to standard risks of owning a stock.

To reduce the risks of a trade, an investor could purchase a call option. This allows them to benefit from upside moves in the stock while limiting risk to the amount paid for the options. However, buying a call option can also require a significant amount of capital and includes the risk of a 100% loss.

Whenever an option is bought, the maximum risk is always equal to 100% of the amount of spent to purchase the option. Since options cost significantly less than a stock, the risk in dollar terms will usually be relatively small to own an option.

To further limit the risks of the trade, an investor could use a bull call spread. This strategy consists of buying one call option and selling another at a higher strike price to help pay for the cost of buying the first call. The spread strategy always reduces the risk of an options trade.

This strategy is designed to profit from a gain in the underlying stock’s price but has the benefit of avoiding the large up-front capital outlay and downside risk of outright stock ownership. The potential risks and rewards of this strategy are summarized in the chart below.

bull call spread

Source: The Options Industry Council

Both the potential profit and loss for the bull call spread are limited. The maximum loss is equal to the net premium paid when the trade is opened. The maximum profit is limited to the difference between the strike prices, less the debit paid to put on the position.

This strategy could be especially appealing with high priced stocks where the share price and options premiums are often a significant commitment of capital for smaller investors.

A Specific Trade for SYF

For SYF, the March 15 options allow a trader to gain exposure to the stock.

A March 15 $30 call option can be bought for about $0.75 and the March 15 $32 call could be sold for about $0.30. This trade would cost $0.45 to open, or $45 since each contract covers 100 shares of stock.

The amount paid to enter the trade is the largest possible loss on the trade. This is generally true whenever a trader is creating a debit to enter an options trade. “Creating a debit” means there is a cost to enter the trade. You could create a debit by simply buying puts or calls to open a directional trade.

In this trade, the maximum loss would be equal to the amount spent to open the trade, or $45.

The maximum gain on the trade is equal to the difference in exercise prices less the amount of the premium paid to open the trade.

For this trade in SYF the maximum gain is $1.55 ($32 – $30 = $2.00; $2.00 – $0.45 = $1.55). This represents $155 per contract since each contract covers 100 shares.

Most brokers will require minimum trading capital equal to the risk on the trade, or $45 to open this trade.

That is a potential gain of about 244% based on the amount risked in the trade. The trade could be closed early if the maximum gain is realized before the options expire.

In this trade, options provide income and defined risk. These are the type of strategies that are explained and used in TradingTips.com’s Extreme Profits Calendar service. This service uses seasonals as one indicator in its trade selection process. To learn more about how options can be used to meet your goals, click here for details on Extreme Profits Calendar.