Walmart Could Provide a Triple Digit Gain to Investors
Trade summary: A bull call spread in Walmart Inc. (NYSE: WMT) using the January $150 call option which can be bought for about $5 and the January $155 call could be sold for about $3.05. This trade would cost $1.95 to open, or $195 since each contract covers 100 shares of stock.
In this trade, the maximum loss would be equal to the amount spent to open the trade, or $195. The maximum gain is $305 per contract. That is a potential gain of about 156% based on the amount risked in the trade.
Now let’s look at the details. The news setting up this trade is a partnership with a tech company the retail giant announced. That news was on TechCrunch,
“The last time we wrote about JoyRun, it was raising $10 million. Today, the Bay Area startup has some very different news to share, as it becomes part of Walmart as Walmart has purchased select assets in a bid to enhance its supply chain. The mega-retailer announced today that it has acquired “select assets – including the talent, technology platform and IP” from the company, in a bid to incorporate its peer-to-peer food and drink delivery service into its own last-mile logistics.
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Walmart EVP Srini Venkatesan notes that the app has amassed a network of 540 third-party merchant partners and north of 30,000 people who have delivered goods with the service since its launch half-a-decade ago. JoyRun’s service is a bit of twist on more standard delivery apps like Seamless and Uber Eats.
As we described it back in 2017, “The company’s app lets people find out who, nearby, is already heading out to a restaurant that they like, then tack on an order of their own.” It will be interesting to see how Walmart integrates this technology into its existing chain, though from the sound it, Walmart would essentially be relying on non-professionals to delivery goods like groceries.
The system would likely operate in a manner like Amazon Flex — a kind of Uber/Lyft gig economy-style approach to delivery.
“This acquisition allows us to further augment our team and ongoing efforts to explore even more ways to deliver for customers in the future,” Venkatesan adds. “For instance, Runners could complement our SPARK program and 3rd Party delivery providers. Our goal is to deliver as quickly and efficiently as possible.”
Walmart expects the deal to close “in the coming weeks,” which will incorporate JoyRun into its Supply Chain Technology team. Terms of the deal were not disclosed.”
The news comes as Walmart appears to be completing a consolidation pattern on the daily chart.
The longer term chart using weekly data shows WMT is in a strong uptrend and a breakout offers a piece target of about $165 based on the depth of the recent consolidation.
A Specific Trade for WMT
For WMT, the January options allow a trader to gain exposure to the stock. This trade will be open for about three weeks and allows for traders to turn over capital quickly, potentially compounding gains several times a year.
A January $150 call option can be bought for about $5 and the January $155 call could be sold for about $3.05. This trade would cost $1.95 to open, or $195 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 $195.
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 WMT, the maximum gain is $305 ($155- $150= $5; 5- $1.95 = $3.05). This represents $305 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $195 to open this trade.
That is a potential gain of about 156% based on the amount risked in the trade. The trade could be closed early if the maximum gain is realized before the options expire.
A Trade for Short Term Bulls
As with the ownership of any stock, buying WMT 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 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 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.
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.