Walgreens Boots Alliance (WBA) Option Traders Still See Upside

Sector rotation remains strong

The price for shares of Walgreens Boots Alliance, Inc. (WBA) recently broke its winning streak after the company reported earnings for the fiscal first quarter. Walgreens beat analysts' expectations for both earnings per share (EPS) and revenue. However, the share price fell nearly 3% after Walgreens spoke of rising labor costs. Analysts expected the company to announce $1.33 in EPS and $32.74 billion in revenue for the quarter—the company reported $1.68 in EPS and $33.90 billion in revenue.

Revenue was driven by an increased number of COVID vaccines in the first quarter and increased retail sales, as shoppers bought at-home COVID tests in addition to cold, cough, and flu medications. Same-store sales rose 10.6% compared with the same period a year ago, representing the largest increase in more than 20 years. Walgreens raised its forecast for the year despite higher anticipated labor costs.

Option trading volumes indicated that traders had been buying call options and selling puts; however, option activity after earnings suggests that traders are optimistic that Walgreens stock could continue to trend upwards. That's because the price action remains in an upward channel, while option activity implies that traders are selling puts and buying calls.

Over the past month, Walgreens stock has outperformed nearly all of the top holdings of State Street's Consumer Staples Sector ETF (XLP). The sector itself has outperformed the market as a whole as new year and inflation-based sector rotation begins.

Key Takeaways

  • Traders and investors bid down the share prices of Walgreens following the earnings announcement as the stock fell 2.89%.
  • The share price of Walgreens remains in an upward trend despite the recent decline. 
  • Over the past month, the consumer staples sector has outperformed the overall market, and Walgreens stock has outperformed the rest of its sector.
  • Put and call option activity appears to be positioned for the price to rise in the near term.

While option trading and price action can provide insight into the sentiment of traders and investors on expectations for a company's performance in the near future, it's imperative to account for current stock performance in relation to its sector and the market as a whole while considering larger macro factors. Walgreens is a member of the consumer staples sector, which has recently outperformed the market at large. Over the past month, State Street’s Consumer Staples Sector ETF (XLP) has added 6%, while State Street's S&P 500 Index ETF (SPY) has remained flat. The chart below depicts the recent performance of XLP compared to nine other sectors of the S&P 500.

Recent performance of XLP compared to 9 other sectors of the S&P 500

What's notable on this chart is sector rotation that appears to be preparing for the increase of interest rates to combat inflation. Since the beginning of the COVID-era economic recovery, the technology sector (XLK) had far and away outperformed every other sector. Over the past month, XLK has only barely beaten out the consumer discretionary sector (XLY). Meanwhile, sectors typically associated as safer havens during times of rising inflation—XLP, energy (XLE), materials (XLB), and financials (XLF)—are all not only on the rise but outperforming the market as a whole.

This movement of funds could be investors and traders anticipating the next stage of the economic cycle. Not only are sectors that tend to perform better late cycle doing well, but sectors that historically underperform late cycle are selling off. This could be anticipation of an incoming bear market or recession.

Inside the Consumer Staples Sector

Consumer staples refers to a set of essential products by consumers. This category includes things like food and beverages, household goods, hygiene products, and even alcohol and tobacco. These goods are products that people are unable—or unwilling—to cut out of their budgets regardless of their financial situation.

Because of this, demand for consumer staples is relatively constant. This makes consumer staples stocks less affected by inflation and recession. These stocks are characterized by steady if unspectacular growth, solid dividends, and low volatility.

The chart below compares the recent performance of WBA with the top holdings of State Street's Consumer Staples Sector ETF (XLP).

Recent performance of WBA with the top holdings of State Street's Consumer Staples Sector ETF (XLP)

Despite accounting for less than 2% of the weighted holdings of XLP, Walgreens stock has outperformed nearly all the top holdings of XLP over the past month, only barely beaten out by The Coca-Cola Company (KO). The stock with the largest allocation in XLP is The Procter & Gamble Company (PG), which accounts for more than 16% of XLP's holdings. PG has gained 7.3% over the past month, compared to an 8.7% gain from WBA and a 9.5% increase by KO.

It's interesting to note that Costco Corporation (COST), which is the second largest holding of XLP, is at the bottom of this chart comparison, yet it has still outperformed SPY over the past month.

Price Action and Options Look

An analysis of recent option activity combined with technical analysis of share price movement can help chart watchers gain valuable insight into the overall sentiment toward Walgreens stock. The chart below illustrates the recent price action for the Walgreens share price as of Thursday, Jan. 6.

Recent price action for WBA

The chart depicts how the Walgreens share price has remained in a relative upward trend since early December. The highest volume selloff coincided with a death cross of the 20-day and 50-day moving averages, highlighted in yellow and blue, respectively. After this capitulation, WBA rebounded toward its more consistent range around $47 before moving higher. Despite the earnings-based sell off, Walgreens stock remains in an upward trend, highlighted in blue. This trend continued higher after a golden cross in late December.

At first glance, it appears that, despite the recent earnings-based share price decrease, option traders are positioning themselves for the share price to rise in the future. That's because the open interest for Walgreens stock features over 225,000 call options compared to 170,000 puts. Furthermore, recent trading volumes on Thursday favored calls over puts nearly 4-to-1.

It's interesting to note that, while total option open interest and trading volumes favor calls over puts, there is a greater ratio of puts than calls in the current open interest on a percentage basis compared to respective 52-week averages. The current call option open interest is weaker than usual, while put option open interest is higher than normal.

For Jan. 21, the next monthly expiration date for options, it appears that option traders are placing significant bullish bets on Walgreens stock. That's because the single strikes with the higher open interest are the $52.50 calls with 18,500 and $55 calls with 18,000. While the $52.50 calls are currently at the money, the $55 calls represent 4% upside to the current Walgreens share price.

Wrapping Up

Walgreens Boots Alliance beat analysts' EPS and revenue expectations. While the company raised forecasts for the year, the share price fell 2.89% the day the company reported earnings, as investors were concerned with increasing labor costs. The company has recently performed well in an outperforming sector, and option traders appear to be buying calls and selling puts, expressing bullish sentiment.