New Trade $COST – Wal-Mart’s Warning to the World

by Dan February 15, 2013 2:47 pm • Commentary

Wal-Mart’s executive emails were just leaked 30 minutes ago, and the company’s management didn’t paint a pretty picture of the U.S. consumer to start 2013.  Apparently, February sales are a “total disaster” at the retail giant’s stores, and management is blaming the payroll tax hike on the poor performance.

Lo and behold, some of that fiscal tightening is starting to have an impact.  With the sequester likely to hit in about a month, more industries are about to feel the impact of that painful adjustment.  Here’s the thing – if the market seemed prepared for these obvious impacts, then they’d be non-events.  But the market is at the height of complacency, so any little blip in the road can get magnified when everyone’s on the crowded vehicle known as the bullish bus.

Wal-Mart’s stock is already down 3% to reflect the news, but its slightly more up-market friend, COST, is down less than 0.5%.  Add to that very cheap implied volatility pricing even though the company reports earnings on March 12th, and put options look like a great risk/reward here.  Finally, the chart is of a stock that can’t seem to rally over the past month, even in a strong tape:

 

COST 1 yr chart from Bloomberg
COST 1 yr chart from Bloomberg

The 200 day ma around 96 seems achievable if earnings in March disappoint.

Vol is cheap especially considering the company will report in March (IV30 red, HV30 blue):

Screen Shot 2013-02-15 at 12.33.24 PM
from LiveVol Pro

 

TRADE: COST ($101.85) Bought the Mar 100 Put for 1.20

-Bought 1 Mar 100 Put for 1.20

Break-Even on March Expiration:

-Profits below 98.80

-Losses up to 1.20 between 98.80 and 100, max loss of 1.20 above 100

Trade Rationale:  VOL too cheap with event….will look to spread….