How to generate income from stock pullbacks: a Walmart example

For investors considering buying Walmart (WMT:xnys) shares, this pullback may present an opportunity to generate extra yield using options strategies. One such approach is selling cash-secured puts, which allows investors to earn a premium while setting a lower entry price for the stock.

Important note: The strategies and examples provided in this article are purely for educational purposes. They are intended to assist in shaping your thought process and should not be replicated or implemented without careful consideration. Every investor or trader must conduct their own due diligence and take into account their unique financial situation, risk tolerance, and investment objectives before making any decisions. Remember, investing in the stock market carries risk, and it's crucial to make informed decisions.

Selling a Cash-Secured Put: Generating Yield While Waiting for a Dip

A cash-secured put is a strategy where an investor sells a put option while holding enough cash in reserve to buy the stock if assigned. This strategy works well in uncertain market conditions where an investor is comfortable purchasing the stock at a lower price.

Trade Structure:

• Sell the 92.5 put expiring March 21, 2025 for $1.37 per share
• Total premium received: $137 per contract (~1.5% yield over 25 days)
• Break-even price: $91.13 (strike price minus premium received)
• Maximum risk: The stock dropping significantly below $92.5 at expiration, leading to assignment, which would require to buy the stock at $92.5 (but keeping the $1.37 per share premium, effectively lowering the price to $91.13)
  Remember: 1 contract covers 100 shares!

Why Now? Evaluating Implied Volatility

Walmart’s implied volatility (IV) sits at 20.96%, which is relatively elevated given its 40.59% IV rank. This means options premiums are moderately attractive, providing an opportunity for put sellers to collect solid premiums while waiting for a potential entry point.

Alternative Strategies for Different Outlooks

To provide a well-rounded perspective, here are additional options strategies based on different market outlooks:

• Neutral Outlook: A strangle (selling an out-of-the-money put and call) could work for investors expecting Walmart to stay within a range.
• Bearish Outlook: Buying a put option or a put debit spread (buying one put and selling a lower-strike put) allows investors to hedge or speculate on further downside with a lower capital outlay.

Conclusion: Yield Enhancement While Staying Flexible

For investors comfortable with the potential of owning Walmart shares at a lower price, selling cash-secured puts offers an effective way to generate additional yield while setting up a discounted entry. If Walmart stabilizes or rebounds, the premium collected enhances returns. If the stock declines further, investors acquire shares at a reduced cost.

For active investors looking for strategic alpha, options provide flexibility in various market conditions. Whether aiming to generate income, hedge risk, or position for a potential rebound, structured options trades can enhance overall portfolio efficiency.