3 Retail Stocks to Sell Covered Calls On

retail stocks - 3 Retail Stocks to Sell Covered Calls On

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I’ve noticed a hat trick of retail stocks that are in longer-term uptrends, but have petered out recently. That said, this shift in momentum is likely temporary and will give way to another up-leg. But while they’re pausing, we have a perfect opportunity for an options cash flow strategy.

These come in many flavors, but the most popular is the covered call. It offers the twin benefits of monthly income and downside protection.

However, that’s not all!

You also improve your probability of profit versus outright stock ownership and reduce your positions’ volatility. And because these stocks are all above $100, we’re going to do a cheaper variant of the strategy. It’s appropriately named the Poor Boy’s Covered Call.

Overall, the main idea is to buy an in-the-money call option instead of stock. It drastically reduces the cost, but still acts as an effective proxy for owning shares.

So, with all of that in mind, here are the three retail stocks I have my eye on:

  • Walmart (NYSE:WMT)
  • Costco (NASDAQ:COST)
  • Target (NYSE:TGT)

Let’s take a closer look at the charts, and discuss how to build your position.

Retail Stocks to Sell Covered Calls On: Walmart (WMT)

Walmart (WMT) stock chart showing bull flag pattern
Click to Enlarge
Source: The thinkorswim® platform from TD Ameritrade

Ever since Walmart’s monster surge this month on the release of its Walmart Plus service, the stock has been holding firm. The past two weeks have formed a high base pattern that shows bulls quickly buying into any weakness. The persistent bid has me warming to adding exposure. One benefit of the pause is it’s allowing the 20-day moving average to catch up and overbought pressures to ease.

If you think the stock will continue to exhibit neutral to bullish behavior, then a poor boy’s covered call is a smart play. The structure involves buying a longer-term in-the-money call option, and selling a short-term out-of-the-money call. In this case, I’m going to buy a two-month contract while selling the front month.

The Trade: Buy the Sept. $130 call and sell the Aug. $135 call for around $3.50.

Costco (COST)

Costco (COST) chart showing ascending triangle pattern
Click to Enlarge
Source: The thinkorswim® platform from TD Ameritrade

Costco scored a high volume breakout earlier this month, running to a new all-time high. And since then, it’s been coiling nicely to digest the gains. That said, what’s particularly impressive is the series of higher lows developing during the consolidation. Demand continues to increase, revealing dip buyers haven’t lost their aggressiveness.

Given the length of the chop, the 20-day moving average has almost caught up. In turn, this is usually about the time that an upside breakout occurs. The $330 ceiling has been tested for six days in a row, and I suspect its strength is waning. To prepare for the next advance, but to hedge our bets in case COST stock keeps treading water, let’s build a poor boy’s covered call.

The Trade: Buy the Sept. $320 call and sell the Aug. $332.50 call for around $10.30.

Retail Stocks to Sell Covered Calls On: Target (TGT)

Target (TGT) chart showing imminent breakout
Click to Enlarge
Source: The thinkorswim® platform from TD Ameritrade

Target rounds out our trio of retail stocks. Its shares are moving into the third month of an ascending triangle pattern. And like Costco, the series of higher pivot lows in TGT stock reflects increased buying aggression.

The latest upswing is pulling the 20-day moving average higher, and confirms bulls are wresting control of the short-term trend. The intermediate, and long-term trends are already pointing higher, as evidenced by the ascending 50-day and 200-day averages. Thus far, $125 is holding firm as resistance. However, I think its days are numbered.

A poor boy’s covered call will profit from the imminent breakout, but it will also generate gains if Target remains in its range.

The Trade: Buy the Sept. $120 call while selling the Aug. $128 call for a net debit of $4.95.

For a free trial to the best trading community on the planet and Tyler’s current home, click here! At the time of this writing, Tyler held bullish positions in WMT.


Article printed from InvestorPlace Media, https://investorplace.com/2020/07/3-retail-stocks-to-sell-covered-calls-on/.

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