New Trade – Low Prices in $WMT

by Dan June 3, 2015 12:15 pm • Commentary

In early April we placed a defined risk bullish trade in shares of Walmart (WMT) when the stock was $81, using key technical support at $80 as a stop (read here).  We closed the position for a small loss (read here) prior to the very disappointing Q1 results a couple weeks ago that resulted in a 6% decline that took the stock to current levels.

We are nothing if not persistent.  This chart back in early April got us looking at the stock:

WMT 1yr chart from Bloomberg

And this chart got us out on May 18th:

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.

WMT 1yr chart from Bloomberg

Oh yes, the Death Cross. It kinda worked.

But let’s now take another look. The two year chart below shows the importance of the mid to low $70s for the WMT. Aside from $75 being a nice roundish number, it holds little technical significance, but it’s close:

WMT 2yr chart from Bloomberg
WMT 2yr chart from Bloomberg

On a 1 year basis $75 is kind of a level:

WMT 1yr chart from Bloomberg
WMT 1yr chart from Bloomberg

The charts say the stock could be a buy soon, but let’s check on fundamentals first. There are few signs indicating a turn in sales.  The company reported a same store sales comp of only 1.1% in the quarter and the effects of the strong dollar and higher gas prices could serve as a meaningful near-term headwind.

But is there a trade here?  The negative fundamental news is fairly well known, and was recently reinforced by Costco’s (COST) mixed results last week.  With the stock down 13% on the year, down 17.5% from the 52 week and all time highs made in January, the stock feels range-bound and $80 could serve as massive technical resistance, with $70 as massive technical support:  

[caption id="attachment_54159" align="aligncenter" width="600"]WMT 5yr chart from Bloomberg WMT 5yr chart from Bloomberg[/caption]

Range Trade: We’ve discussed defining risk with short premium structures recently, you can read more here. The bottom line on these trades is that they need to be done consistently and not as one offs. WMT’s recent consolidation after a selloff makes it a good candidate to stay in a range for a few weeks at least. With that in mind we want to play for consolidation in and around $75 over the next couple weeks:

Trade: WMT ($74.90) Buy June 73 / 75 / 77 Call Fly for .75

-Buy 1 June 73 call for 2.21

-Sell 2 June 75 calls at .84 each or 1.68 total

-Buy 1 June 77 call for .22

Break-Even on June Expiration:

Profits:  between 73.75 and 76.25 of up to 1.25 with max gain of 1.25 at 75

Losses: up to .75 between 73 and 73.75 and between 76.25 and 77 with max loss of .75 below 73 and above 77

Rationale: This trade structure offers a high probability trade of success for at least a small profit in the next two weeks. It’s max gain is near where the stock is currently trading. The risk of course, is a breakdown to lower lows or a sudden move higher. We’ll keep a stop around the wings of the trade (73 and 77) and look to be patient as long as the stock is near $75 as it will gain in value as long as that’s the case and there are no sudden moves higher in implied volatility.