Back on April 2nd we placed a bullish trade on shares of Walmart (WMT) when the stock was 2% higher. To refresh:
TRADE: WMT ($81.10) Buy June 80/85/90 Call Butterfly for 1.35
WMT had pulled back to its prior breakout level, and should have found some support at $80, which is why we chose and in the money call fly to define our risk to that important technical level and help off-set some decay as we waited for the next catalyst, tomorrow’s Q1 earnings.
Event: The options market is implying about a 2.5% one day move (the May 22nd weekly 79.50 straddle, with the stock 79.50 is offered at 2.10, if you bought that you would need a move above 81.60 or below 77.40 to make money by Friday’s close, or about 2.5%). The average one day move over the last 4 qtrs has been about 2.75%.
What to do now? With the stock at $79.50 the call butterfly is worth about 1.00. After tomorrow’s earnings, if the stock does not move, the only option we will need to focus on will be the June 80 calls, as the 85s calls will be worth pennies, and the 90s will not be worth trading out of, we don’t sell options we are long at a penny.
The chart of WMT looks bad after its technical break of $80, and has consolidated below the important $80 technical level. Whats’ more, the 50 day moving average just crossed below its 200 day moving average, some would call that a death cross, highlighting declining momentum and possibly lower lows.[caption id="attachment_53735" align="aligncenter" width="600"] WMT 1yr chart from Bloomberg[/caption]
Given some of the recent results we have seen from mid range retailers like KSS, and apartment stores like DDS, JWN and M I see few bright spots for retailers.
I am going to cut my losses and not risk the potential to lose most of the premium on the spread on what could be a binary outcome post earnings.
Action: Sell to Close WMT ($79.50) June 80/85 1×2 call spread at 95 cents for a 40 cent loss
As I said above, I am not going to sell the 90 calls, as it is not worth the commissions paid to do so.
I think it is important to note that a 2.5% move lower on results means the spread is nearly worthless, while a 2.5% move higher results only in a small profit. Therefore it makes sense not to let this trade ride on that binary event as the odds just aren’t in its favor.