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The best move I could’ve made would’ve been to buy my WMT naked put before it expired and since I didn’t, I had to decide if I should dump the shares or sell a covered call. For the past couple of weeks when I needed to make a decision, I didn’t, and it cost me as WMT drifted lower. I started to place a limit order for an in the money covered call last week before WMT pulled back above its 200-day moving average and then opted to wait longer to see if the price decline was going to get a bounce. Instead, the stock fell again and today marked its fourth day below its 200-day moving average.

While WMT was trading at $86.86, I sold one WMT May $87.50 covered call for $2.88 and received $287.32 after paying $0.68 in commission. I’m not certain I want to hold onto the shares at all any longer, but figured it is smarter to sell an out of the money covered call while I’m thinking about it. If the stock price declines further, I’ll have the slight cushion of the call premium to cut my losses. If it climbs before expiration, I have an established exit price now. If it stays flat, I get to keep the premium, reduce my cost per share and repeat the trade if I haven’t decided to accept the stock loss without a new call.

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I’ll write about the amount of my realized loss when I exit this position eventually. For now, I can (and should) only focus on what I can do with the stock at its current price, not where I bought it. Based on the price when my covered call order went through, I can make a 4.04% gain (an annualized return of 27.31%) if assigned the call option. If WMT magically stays flat through expiration, I’ll earn 3.42% from the premium alone. That’s 23.1% annualized.

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From a risk/reward perspective, I think this is a good trade. After falling 21.02% from its intraday high on January 29, I don’t think it has more than 4-5% downside remaining. Actually, I expect it to find a bottom close to its intraday low of $85.29 hit two days ago. I don’t like that it’s below its 200-day moving average but considering how bad stocks throughout the major indexes have been for the past 12 days, WMT doesn’t look too bad.

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