Gassing Up With Wal-Mart For The Long Term

| About: Wal-Mart Stores, (WMT)

Wal-Mart (NYSE:WMT) tends to perform better when the price of gasoline is lower, as the money saved by its customers for fuel purchases is often redirected to Wal-Mart. This bodes well for the company, as the International Energy Agency predicts the U.S. will become the world's biggest oil producer within five years and a net exporter around 2030. The energy industry in the U.S. has been booming over the last several years with the advent of new technologies such as hydraulic fracturing. And with increased supply oil prices should drop or at least maintain the status quo, which should provide Wal-Mart shoppers with more money to spend at their favorite retailer.

In Wal-Mart's most recent Q3 2012 earnings report released on November 15, 2012, the company reported revenue of $113.2 billion which represents a 3.4% growth year-over-year. The company reaffirmed its full-year 2012 earnings per guidance to a range between $4.88 and $4.93 per share. Wal-Mart's U.S., International and Sam's Club operations all turned in positive performance with quarterly growth of 3.6%, 2.4% and 4.7% respectively.

On a negative note, the company is facing some Black Friday walkouts related to some unhappy workers. The National Labor Relations Board has postponed a decision in the case until after the Thanksgiving Holiday, so some Wal-Mart Black Friday shoppers could face picket lines and also long lines at the cash register.

Wal-Mart's stock price went ballistic about five months ago and has retreated over the last month as shown below:

With Wal-Mart's ballistic stock price, long-term bullish outlook related to low oil prices and worker related issues, a new investor or an existing investor in the company might consider a protective option position such as the married put. A married put provides unlimited upside with limited downside, so if the company's stock price does well, the investor does well, and if the company's stock price takes a big hit, the investor doesn't take a big hit. The married put may be entered by purchasing a put option against a long position in the stock. The expiration date for the put option is generally selected several months out in the future in order to reduce the per-day cost of the put option "insurance."

A number of married put positions with June 2013 expiration were found as shown below:

The married put using the 2013 Jun 72.5 put option looks attractive with a maximum percent risk of 3.7%. However, the maximum risk shown in the table does not include expected dividend payments and when including expected dividend payments during the holding time, the percent maximum risk is reduced to 2.2%. So, if Wal-Mart's stock price increases, the married put also increases and if the price of Wal-Mart's stock price decreases, the most an investor can lose is 2.2%. The married put position can be entered by purchasing the WMT 2013 Jun 72.5 put option for $6.30 against a long position in the Wal-Mart stock.

Wal-Mart Married Put Trade

  • Buy WMT (existing or purchased)
  • Buy WMT 2013 Jun 72.5 Put at $6.30

A profit/loss graph of the Wal-Mart married put trade, including expected divided payments, is shown below:

If the price of Wal-Mart's stock increases, the value of the married put also increases, and if the price of Wal-Mart's stock tanks, the value of the married put remains unchanged for a stock price less than the $72.5 strike price of the put option. And, if the price of the stock increases above the $72.5 strike price of the put option, income methods may be applied in order to receive income and reduce risk.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.