How To Trade Whirlpool Into 2023

Summary

• With headwinds looking like they will persist into 2023, we are looking for ways to create some outperformance.
• Investors can sell covered calls in a way that retains some upside in the stock while also generating a respectable option premium.
• WHR pays a healthy dividend and with the sale of a covered call one can create a total yield of 9.57% from this holding.

Roberto Galan

Whirlpool (NYSE:WHR) has been a name that we have liked for years, and for those who have held it for a few years (prior to the current year) then you know all about the good times with this name. When the housing market is decently strong and the economy is moving forward with little to no headwinds, Whirlpool is a stock that can, at times, provide some decent outperformance for one's portfolio. Add in the fact that the company has a strong dividend history and a very favorable total return picture begins to emerge.

It is no secret that we like Whirlpool for a long-term hold, as we have covered it twice this year already. In the first article, we discussed why it made sense for Warren Buffett to purchase the company, and in the second, we discussed the bolt-on acquisition of Emerson Electric's (EMR) InSinkErator business. Long-term this company is built to survive, but right now it is painful to own and a total drag on performance. No need to worry, though, because we have a trade for the new year that we think makes Whirlpool a compelling component for both growth and income portfolios.

So What Is The Trade?

Whether one already owns Whirlpool or wants to add exposure to the name, we think that looking to the options market makes sense here. As many of our readers know, we are not extremely optimistic about 2023 and see a number of headwinds, but we do think that most of the pain of this pullback has already been experienced in 2022. This is why we think that the January 19, 2024 maturity date makes sense for selling covered calls.

Specifically, we like the January 19, 2024 Calls with a strike price of $180/share. By selling a covered call here, with the stock at $142.88/share, you leave yourself $37.12/share of upside, or nearly 26% upside, while also locking in an option premium of around $8.40/share, or 4.67%.

Why Do We Like The Trade?

We like this trade for a few reasons. First, this strike price provides a decent amount of ceiling for us to profit (basically 26%) off the shares if we are incorrect in what we expect to be at best a sideways year for the market. The argument can be made that you could utilize a lower strike price, and for some investors that might work, but we like the idea of keeping most of the potential gains we believe a stock to have for ourselves.

Data by YCharts

The option premium is also key here. It provides a 4.67% yield at these prices, which is pretty close to Whirlpool's dividend yield. The roughly $8.40/share in cash received, or $840 total per contract, covers some of the potential downside on the stock, which is also a bonus.

Lastly, the stock pays a dividend of $7.00/share per year. The sale of this specific option could result in an investor being able to collect the entirety of the annual dividends due to the timing of Whirlpool's last quarterly dividend ex-date (historically around the middle of November), which this year was November 17, 2022. Even if the call is trading a bit above the strike price around this date, unless it is worth exercising the option at that time (two months early) then you will get to claim that dividend too. Having an option worked out before maturity happens, usually with about a month to go from experience, but the option would have to be in the money a decent amount and the dividend worth claiming.

In total, the trade can potentially deliver a total return for investors of roughly 35.55%, when combining the potential capital gain, the option premium, and the dividends (assuming all are collected before a potential call). If the shares are not called, then the investor gets the dividends and option premium and would have 4.67% of outperformance on the position.

Final Thoughts

This all boils down to where one thinks that Whirlpool trades in 2023 and the first few days of 2024. We believe this option premium does the job in paying us to stick around and cuts what we see as the potential downside in the stock in half.

There is the argument to be made that if one is not extremely bullish on the next 13 months or so, then why not grab more premium and give up more upside, and we cannot argue with that logic. We actually did look at the January 19, 2024 Calls with a strike price of $170, which has you give up about 600 basis points of capital gains upside (potential) to get an extra almost 200 basis points of option premium. Not horrible, but you only get about 19% of potential upside from current prices and as we said before, we like to attempt to set up a trade such as this to capture most of any potential gain and treat the option premium as a bonus. Still, giving up 600 basis points of potential gains, which are only given up if the stock rises more than ~19%, to pocket 200 basis points of return today is compelling.

With the volatility in the market over the last few weeks, investors might do well to look at their portfolio to see if trades such as this make sense.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of WHR either through stock ownership, options, or other derivatives. 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.

We have positions in WHR and have sold covered calls in both client portfolios as well as personal portfolios.

Comments

[Kamikaze Cash]

I like the underlying a lot, and I think this is a good valuation for taking a long position. I can't quite get on board with the deep OTM strike and long time horizon, though. Hitting $180 would make this a strong year for Whirlpool, and I can't quite see it.

I think selling 60-DTE covered calls a few strikes OTM would probably yield a better return, with more realized gains for reinvestment.

This would require some more management, but I'm addicated to trading anyway.

[Matthew Smith]

@Kamikaze Cash definitely more management, but so long as the stock doesn't pull back sharply or your shares get called away early on, then yes you should be able to generate larger cash flows...but higher probability of getting called with strike price being closer to current stock price.

And at $180 it would be a good year. This trade was set up to hopefully not get called, but if the shares were called to at least be at a price that we could live with (while generating an option premium upfront that served us well too).

Do it both ways, but for this trade it was serving a purpose for the portfolio.

I like your aggressiveness on the OTM trade.

[bengalesq]

Hate Whirlpool here but thanks for the article. I am interested in thoughts on the business here so it grabbed my attention.

[Matthew Smith]

@bengalesq Well I appreciate you reading the article!

[Peter193]

Good and defensive play. The only risk maybe business turn bad and dividends cut. Not likely to happen but we just faced too many once per thousand years event in the past few years.

[Matthew Smith]

@Peter193 Yes, so long as the housing market does not crash and burn this should be a pretty safe play. If mild recession, it is cheaper to buy new washer/dryer or some kitchen appliances rather than doing entire renovation project.

[benet1800]

Interesting thought. It’s kind of far out from here though. I have been selling some puts at 30 days and generating about $4.70 per share premium plus the dividend is kind of nice. If it goes down to my 137 put strike price which it very well-may then I will have a basis of around 132.30. And, my annualized rate of return on invested capital on that is is about 40%. And at that price I’m glad to own the stock if I get assigned the shares. And I already own some of the stock.

[Marod]

@benet1800 @Matthew Smith I've also been selling PUTs. Got assigned early this year but then sold the stock to close the position quickly. Right now my income is $2,700 (on the PUTs) with one open short PUT that is $3.10 OTM. That incomoe is in 9 months of trading.

The covered CALL idea is good and profitable with the dividend included. However, I have doubts about this stock going up next year and I think I can make more with the short PUTs. But this was a good article on what to do if it gets assigned to me again. I am fairly aggressive with short PUTs on this stock. I doubt it has much lower to go, but that depends on the economy next year.

[Matthew Smith]

@benet1800 It is pretty far out, but that plays into the fact that not all portfolios are trading portfolios. So this is a trade for what figures to be a long-term position, so well OTM and decent time on it to generate the required premium to justify everything. Helps with portfolio management sometimes too by forcing you to exit at a given price (which was predetermined based off of your research).

We have used puts on this name before and yes, they can generate decent option premiums, but you cannot go too far OTM. Also, be aware that these are not heavily traded and spreads are wide - like all the time!

Nice returns on your trades though!

[Matthew Smith]

@Marod not bad so far. puts can generate more income right now based off of the market, but also generally speaking - especially if you have a margin account and are not really tying up cash but rather buying power....not always the case, but right now the premiums favor puts

[OverTheHorizon]

Average refrigerator lasts 10-15 years. Probably be able to get a couple of more years out of the old one until economy is less uncertain:
www.bobvila.com/...

[nckadams]

@OverTheHorizon Ha! My refrigerator (ironically not a Whirlpool) is 17 years old and starting to show its age. It's also the oldest appliance in my kitchen. My wife takes your view...."Let's keep it a bit longer." I, on the other hand, am ready for a change...refrigerator, not wife. 😉

[OverTheHorizon]

@nckadams both?

[nckadams]

@OverTheHorizon No....she's got another 50 years on the warranty.

[nckadams]

I don't hold enough WHR to do a covered call, and I'm not inclined to cash secure the difference. Nevertheless, I think your trade suggestion is excellent for those holding a large enough WHR position.

[SleepyInSeattle]

@nckadams Likewise.

[Matthew Smith]

@nckadams @SleepyInSeattle Thanks for reading and the kind comments. I write about other options trades such as this for other stocks (with lower prices too) so feel free to follow so you can see when articles are published.