Shares of Walgreens (WBAWealth Strength IndexWBA is Extremely Down and trending Down) have been punished in recent months on the back of regulatory uncertainty and the Amazon juggernaut. The stock is currently down 36% since early December 2018.
The company recently slashed guidance from 7-12% growth down to just flat on a constant-currency basis.
According to the CEO Stefano Pessina:
“I want to acknowledge upfront that this has been a very disappointing quarter for us. There is nothing entirely new in what we have seen impact our business during the quarter. Let’s say, a number of the trends that we had been expecting and preparing for impacted us significantly more quickly than we had anticipated.”
Walgreens is a dividend champion with a 43-year history of raising its dividend and a current yield around 2.8%. Bargain hunters are sure to start stalking the stock soon, but there could be more weakness in the short-term.
The chart of WBAWealth Strength IndexWBA is Extremely Down and trending Down looks pretty awful and there could be one further leg down before it finds a bottom.
One trade that works well in a situation where sideways to slightly lower prices are expected, is a put diagonal spread. My recent trade ended in with a gain of 5.2% in just a few weeks.
Entering a similar position can currently be done with zero risk on the upside and the potential for a 28% gain.
The May 17th $52.50 puts can be sold for $0.69 and the June 21st $50 puts can be bought for $0.69. This results in a net cost of $0 for the trade.
Selling 10 contracts would mean a maximum risk on the downside is $2,500 which is the difference in the two strike prices times the number of contracts.
The maximum profit on the trade is $700 and would occur if WBS close at $52.50 at expiry of the short (May 17th) options.
The chart below shows there is zero risk on the upside if the stock does bounce. The blue line represents the profit or loss at expiration and the purple line is an interim date of May 6th.
Zooming out, we can see the maximum risk is on the downside.
For a trade like this, I would set a stock loss at $52.50 and if WBAWealth Strength IndexWBA is Extremely Down and trending Down drops below there, I would be out of the trade straight away while hopefully keeping losses below 5%.
Otherwise I would hold to expiry and hope for a close near $52.50.
Options trading involves risk and is not suitable for some investors. Check with your financial advisor before making any investment decisions.
Disclosure: I am currently long VZ
Note: Gavin has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. He likes to focus on short volatility strategies. Gavin has written 5 books on options trading, 3 of which were bestsellers. You can read more from Gavin at Options Trading IQ.