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Walmart’s New Prime Service Is a Game-Changer. How to Play the Stock.

Posted July 15, 2020 at 10:21 am
Steven M. Sears
Barron's

Investors have found a cure for Covid-19.

They are sheltering in stocks that are thriving amid the new abnormal, with tens of millions of people largely at home and wondering if there is an end to the pandemic.

This has led to strong gains in Amazon.com (ticker: AMZN), Netflix (NFLX), and Walmart (WMT), among other companies that offer goods and services that make the quarantine easier to negotiate.

Walmart further secured its place in the Covid-19 immunity club last week on news that it was introducing a service that would compete with Amazon’s Prime delivery service.

Walmart+ is expected to cost consumers $98 a year and offer same-day grocery delivery and discounts at Walmart gas stations. The service was reportedly scheduled to be introduced by April, but the launch apparently was delayed by the pandemic.

The news pushed Walmart’s stock just below a new 52-week high. Shares are likely poised to advance even more should the federal government announce a second Covid-19 stimulus package.

Shawn Quigg, a J.P. Morgan derivatives strategist, has advised his clients who own Walmart to boost returns with a “ratio call spread” to profit from a potential rally. The stock is some $6 higher since Quigg’s note, so we are going to restyle his recommendation, which was to buy the August $130 call option and sell two August $140 calls.

Investors who think Walmart has what it takes to keep thriving during difficult times could consider selling the August $130 put option and buying the August $135 call.

The “risk reversal”—selling a put and buying a call with a higher strike price and similar expiration—generated a credit of about $2.75 when the stock was around $129.80. The strategy positions investors to buy stock at a lower price and to participate in any advances.

If the stock is above the put strike at expiration, investors can keep the put premium. Should the stock be below the put strike price at expiration, investors should buy the stock, rather than cover the put. If the stock price is at $145 at expiration, the call would be worth $10.

During the past 52 weeks, Walmart stock has ranged from $102 to $133.38. Shares are up about 9% in 2020 and up 13% over the past year.

The regular August expiration should cover the release of Walmart’s second-quarter earnings, which were released last year on Aug. 15.

Without doubt, the rebirth of Walmart—and the company’s continuous evolution—has been one of the great success stories in corporate America. Once dismissed as another company in line to be destroyed by Amazon’s ruthless use of technology, Walmart managed to change its retail business to compete in the online world, while demonstrating the value of its sprawling bricks-and-mortar business, which sells a lot of groceries and is thus not as vulnerable to economic contractions as a pure retailer. 

Investors once struggled to understand the story, but not anymore. Now Walmart is valued for its ingenuity and viewed as a proper contender to Amazon. The suggested trading strategy expresses confidence in the company’s abilities to keep innovating and competing.

Originally Postedon July 14, 2020 – Walmart’s New Prime Service Is a Game-Changer. How to Play the Stock.

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