by John Kmiecik | October 15, 2012 9:03 am
Are you done with your holiday shopping yet? If you aren’t, you’re not alone — but it may be wise to shop early this season. According to one company, many shoppers are doing just that. Walmart (NYSE:WMT) said that based on early layaways, this season is shaping up as a big one for the discount retailer. Here’s a trade idea that might be able to take advantage of that outlook and put a little holiday shopping cash in your pocket.
The trade: With WMT trading at $75.81 at Friday’s close, buy the November 75 calls for $2.05 or less.
The strategy: Buying a call is an option strategy that can take advantage of a bullish outlook on a stock. A long call can profit if the stock rises and the call premium increases to an amount more than was paid. Maximum profit is essentially unlimited with a long call because the stock can continue to rise; the maximum loss is $2.05 if WMT finishes below $75 at November expiration. Breakeven is at $77.05 at expiration based on a cost of $2.05.
The rationale: Walmart is making a lot of news lately. The company just announced same-day delivery to compete with Amazon. It’s partnering with American Express (NYSE:AXP) to lure more shoppers with in-line banking. And more important, with less than six weeks until Black Friday, the retailer is looking for a strong holiday shopping season. The company said that in less than a month, U.S. layaway sales rose to $400 million, and it is ordering twice as many iPads as it did last year for the holiday season. The company is planning to add up to 240 stores in 2014 and expects sales growth to rise by 5% to 7%. The stock was just upgraded to “buy” from “hold” at Jefferies on Friday. The company is scheduled to announce its third-quarter earnings on Nov. 15.
Technically, the stock had struggled to get past a resistance area just above $75 for a few months until last week. The stock gapped above the resistance area a couple of times and now looks ready to make a strong move to the upside. It will be bullish if the stock can move past Friday’s high of $76.04. If it does move higher, it has nothing but blue skies above — the chart shows no resistance to slow it down.
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