Update – $WMT May Weekly Regular Put Calendar

by Dan May 11, 2016 2:00 pm • Commentary• Trade Ideas

With retail stocks getting slammed today as result of poor results and guidance from Macy’s (M) I wanted to take the opportunity to update a bearish leaning options trade discussed on CNBC’s Options Action on Friday April 29th, the May 13th weekly / May 20th 65 Put Calendar in Walmart (WMT). The trade was using a calendar to finance a put that isolated their May 19th earnings event.  This is what I wrote at the time:

There are a couple very important inputs for WMT’s earnings and sales that have had massive moves since the company last spoke to investors on Feb 18th.  First and foremost, U.S. dollar strength, which, per the FT.com was in large part the culprit for the annual sales decline:

The 0.7 per cent decline in revenue to $482.1bn for the year ended January was due mainly to the strong dollar, without the impact of which sales would have risen 2.8 per cent.

Since February 19th, the U.S. Dollar Index is down 3.5%, and down 5.5% so far in 2016, and with 26% of WMT’s fiscal 2016 sales coming from outside the U.S., this could serve as a tailwind.

On the flip side, as one would expect, with dollar weakness has come strength in crude oil, up 50% from its mid February lows:


And lastly, Amazon.com’s (AMZN) Q1 results last night demonstrate the growing success of Prime delivery, which helped the company achieve its second fastest growth in North America of 27% yoy in the quarter and its highest retail margin ever in North America of 5.4%.  Consensus estimates call for a 1% decline in WMT’s Q1 sales. AMZN is not only taking share but causing WMT to spend aggressively to build out their online offering including delivery options to compete with Prime.

And this is what I had to say on the show:

Here was the trade from April 29th:

WMT ($66.66) Buy May 13th weekly / May 20th regular 65 put calendar for 50 cents

-Sell to open 1 May 13th weekly 65 put at 50 cents

-Buy to open 1 May 20th regular 65 put for $1

Break-Even on May 13th expiration:

Max profit at $65, but the ideal scenario is that the stock grinds lower, the May 13th weekly 65 put expires worthless, and the premium received for the short put more than offsets the decay of the May 20th regular 65 put that I want to own for the earnings events.  At that point I can look to sell a lower strike put and create a vertical put spread and further reduce my premium at risk.

As I write the stock is trading $66.09, about 1% lower than when the trade was executed, and the trade is a winner with a little more than 2 trading days left to the short leg expiring.

Today, the May 13th 65 put can be put to close for 14 cents, while the May 20th put that we are long can be sold to close at 85 cents, so the spread is worth 72 cents, or 22 cents more than what was paid on April 29th. Since we want to be there for earnings things are working well so far. But we have a decision to make, wait for Friday and roll the short strike by selling a lower strike put in May regular expiration, thus creating a vertical put spread, or leave the May 20th 65 put as is and let it ride into earnings.  Obviously we could roll now, paying 15 cents to close and for instance selling the May 20th 63 put at 35 cents.  The credit of the roll would be 20 cents, making the May 20th 65/63 put spread we would end up long from the roll costing only 30 cents. Not a bad risk reward when you consider there is an upcoming earnings event and how poorly retail stocks have been acting of late post results. But we’d love to see most if not all of this week’s 65 put premium (that we’re short) come in first, making any roll even cheaper.

So we’ll give it a day or two and likely then roll the short put. By waiting longer we may even be able to do a lower strike, like the 62s and have a very cheap vertical spread with nice profit potential into earnings.