Ok I get the reasons why WMT is trading at levels not seen since 2000: Crude Oil down about 20% since early May helps WMT customers dramatically, WMT’s 63% revenue exposure to the U.S. makes it slightly immune to potential recessionary environment in Europe and a slowdown in Asia, and it’s juicy 2.3% dividend, oh and Buffet just announced that he raised his stake. I am sure I am missing a few others, but those are the obvious ones that come to mind.
When I look at the following charts, a one year and a 13 year I only want to do one thing, and that is to short the strength. The way I see it there is little upside from current levels regardless of what the market does……yes it is being viewed as defensive, thus the move Friday, but if we do go lower on Euro debt contagion, slowing growth fears in China, and the uncertainty our own economy faces as we deal with a cooling jobs environment and the upcoming budget debates, I see current levels as un-sustainable, it should under-perform on a rally and get nailed on a big sell off.
[caption id="attachment_13006" align="aligncenter" width="589" caption="1 YR WMT chart from Bloomberg"][/caption]
NOW the 13 year, give me a break, where the hell is this thing going?
[caption id="attachment_13007" align="aligncenter" width="589" caption="13 YR WMT chart from Bloomberg"][/caption]
Well here is the kicker, VOL IS REALLY CHEAP IN THE NAME, ESPECIALLY FOR A STOCK TRADING WITHIN A FEW % OF ITS ALL TIME HIGHS.
At the money implied vol is offered at about 17.5 in July vs the 30 day realized of 17.3 and the 60 day realized of about 20.
No matter what your view is, I want to own premium into what I think will be a particularly rocky period for the markets as we head into a plethora of geo-political stuff and then Q2 earnings in mid July. I am obviously more inclined to look down then up in a name like this, obviously a contrarian trade. We at RiskReversal often debate the merits of being contrarian for just contrarian sake, I don’t believe this is what I am doing in this instance.
Enis and CC like to press weakness on the short side, and usually stay away from shorting strength, but in this situation, Vol is cheap enough where it won’t take much to get bailed out, even if I don’t get a move back to the mid to low 60s.
TRADE: WMT ($68.15) Bought the July 67.5 Put for 1.25
Will look to turn into a put spread as stock goes my way, and as vol ticks up a bit.
Break-Even on July expiration:
- Profit below 66.25,
- Losses of up to 1.25 btwn 66.25 and 67.50, max loss of 1.25 above 67.50, less than 2% of the underlying.