The relative strength in Wal-Mart Stores, Inc. (WMT) is virtually unmatched these days. Which is an interesting role reversal since the mighty retailer limped into year-end with the dastardly title of worst performing Dow Jones component hung around its neck.
It’s as if Walmart stock pulled a David Copperfield, deftly escaping that claustrophobic collar which had heretofore stymied each and every recovery attempt.
Now, WMT shines as the best performing Dow stock year-to-date.
I’ve recently trumpeted its virtues (see here and here), but recent developments warrant a follow-up for active traders looking to score better returns. Buyers flocking to WMT have driven its share price into overbought territory, suggesting a bit of profit taking is comin’ round the corner.
With Walmart stock price down 1% at the time of this writing it appears the selling has already begun.
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On top of its overbought status, the recent rally in WMT has driven the stock to its descending 200-day moving average, a logical area for resistance if there ever was one.
Traders unwilling to part with their WMT stock, but are desirous of receiving some income (and a bit of protection from any type of selling spell) should consider a covered call.
The covered call consists of selling one call option for every 100 shares owned. By selling the covered call you promise to sell your shares at a set price in exchange for being paid a premium. That premium provides a modicum of income as well as a buffer against a small loss in the stock.
How to Trade Walmart (WMT) Stock
For example, you could sell the March $70 call for 85 cents, obligating you to sell your Walmart shares at $70. With Walmart stock price at $66.50 that means you can still participate in another $3.50, or 5% of upside in the coming month.
The call premium received will offset up to 85 cents of downside in the stock, essentially buffering a small downturn.
Another alternative would be selling the March $67.50 call for $1.65. The closer-to-the-money call offers twice the income and protection, but does limit your upside in the stock.
Either covered call will outperform full-on stock ownership in the event Walmart stock cools in the coming week as profit takers finally have their way with the overbought stock.
At the time of this writing Tyler Craig had no positions on any of the aforementioned securities.
