Last week we thought that Walmart’s (WMT) year to date out-performance was a bull trap in a bad market after the stock had experienced massive under-performance the prior year. We expressed this bearish view buying merely buying near the money puts in February that would capture the company’s Q4 earnings results. Here was the trade from Jan 7th:
*Trade Idea: WMT ($64.50) Buy to open Feb 65 put for $2.20
Rationale: This is something we’d look to spread on weakness, possibly even by creating a vertical put calendar with a sale in January if the market weakness continues and vol goes higher.
Well the stock has sold off with the market, and testing that downtrend that had been in place from its Jan 2015 highs. The puts we bought are basically a double. This gives us the opportunity to sell the original puts, book some profit and then roll lower and reduce our premium at risk, while maintaining our bearish view. So here’s what we’re doing. First, we’re closing the Feb 65 puts for a profit:
ACTION – WMT ($61.95) sold to close the Feb 65 puts at $3.75 for a $1.55 profit
But we want to keep our bearish view but with a lot less overall premium risk so here’s the new trade:
*WMT ($61.95) Bought to open the Feb 60/57.5 put spread for 60 cents
- Bought 1 Feb 60 put for 1.20
- Sold one Feb 57.5 put at 60 cents
Rationale: This keeps us in the game for a move back towards the lows, but we’ve booked profits already in the position so have reduced our premium at risk on the new trade as well as taken short deltas off.
The chart from the all time highs shows the downtrend that we identified last week that we thought the stock could re-test on a reversal. The new trade highlights the new short strike of the put spread that we rolled into as an area the stock could find some support: