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Monday, February 14, 2011

The most boring 30ish% return of all time

Wal Mart is one of the most boring stocks ever. It basically just hangs out in the $45-55 range. Even during the financial crisis, Wal Mart only went down to $43/share. The people of Wal Mart, on the other hand, are always exciting. Other stocks have rebounded 100-500% off their lows of the financial crisis, but boring old Wal Mart is only up 27% from its lows. I don't expect it to go much higher anytime soon. Neither do most people, as JP Morgan downgraded the stock because they see low income people leaving Wal mart for cheaper discount stores and other shoppers ditching wal mart for pricier retailers. However, Wal Mart is the largest retailer in the US, is expanding in emerging markets rapidly, and sports a healthy 2.2% dividend yield. Shares might suffer in the near-term, but with a few changes in the next 22 months, hopefully Wal-Mart will rocket to $55.01 and make this buy-write return almost 30%.

Buy 100 WMT @54.80                    $(5,480)
Sell 1 WMT Jan 13 $55 Call                $505
Sell 1 WMT Jan 13 $55 Put                 $640
Total outlay:                                    $4,335

Potential return: $1,407 including dividends or 32% return on cash invested on a stock that needs to increase <1% in the next 22 mos.

Break-even: 49.18 or 10% below current prices


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