options trade that I have on. I’m holding a large chunk of the March 2006 $47.50 calls, and a smaller amount of March 2006 $50 calls. I picked up the $47.50 calls at an average basis of $3.20 per contract. I picked up the $50 calls for $1.90 this past Friday. Here’s my thinking:
Walmart stock’s volatility is extremely low. Being a Dow component helps. As a result, the option price is pretty cheap compared to even large cap tech stocks. The $47.50 calls cost me $3.20. It’s in the money by $2. So what I’m really paying for is $1.20 for the right to WMT’s upside from now until March 17, 2006. To put it in other words, if WMT is at $50.70 on or before March 17, 2006, I break even. Anything on top of that, and I’m making money.
Why do I like the $47.50’s? The $50 calls are not in the money. So I’m really paying $1.90 for the privilege to WMT’s upside from now until March. But the initial outlay is lower per contract. With the $45 calls, I would be paying 90 cents for that privilege, but the intial outlay is much higher since it’s further in the money.
For me, it’s like buying a $3 tech stock with the upside potential of Nasdaq, backed by the steadiness of a Dow component.
Buyer beware: options are extremely risky. Do not construe any of the above as investment advice.
Update: It seems Warren Buffet thinks Walmart is a value here as well.
WASHINGTON (Reuters) – Berkshire Hathaway Inc. (NYSE:BRK-A – News; NYSE:BRK-B – News), a company run by billionaire investor Warren Buffett, on Monday revealed previously undisclosed holdings of shares in Anheuser-Busch Cos. (NYSE:BUD – News) and Wal-Mart Stores Inc. (NYSE:WMT – News).
According to amended U.S. regulatory documents, Berkshire Hathaway disclosed that it held 44.7 million shares of Anheuser-Busch stock valued at about $1.9 billion and 19.9 million shares of Wal-Mart stock valued at about $874 million as of September 30.
It’s nice to have validation from the most influential value investor. Even better is that he has a legion of investors who follow his lead.
Update 2: Wal-Mart’s Black Friday numbers are better than expected, and they forecast November same-store sales growth to be 4.3%. This number is without new stores and former Wal-Marts converted to Wal-Mart Supercenters. It’s looking like a merry Christmas indeed.