Rolling Down to $WMT

by CC May 13, 2016 1:14 pm • Commentary• Trade Ideas

Two days ago we updated our thoughts on trade management for our Walmart (WMT) calendar. We initiated this trade with the idea of financing downside puts that catch earnings (5/19, before the opening bell) by selling the same strike put expiring today. Here’s what we said a few days ago:

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

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.

Now with mere hours left until the May13th weekly 65 puts expire we’re in good shape for a roll. With the stock at 65.00 the entire trade is worth about 1.25 vs the .50 initially paid. 65 is a very important strike into earnings as it’s basically where the stock will try to hold its 200 day moving average (64.70). Below that 62 looks like the next level of support if WMT is unable to hold the 200 day:


Patience into today’s expiration paid off and now we’re able to roll the short strike:


-Bought to close 1 WMT ($65.15) May13th weekly 65 put for .15

-Sold to open 1 May20th 62 put at 0.50

New position – Long the WMT ($65.15) May 65/62 put spread for .15 (currently worth .95)

Rationale – We have now financed an earning event put spread that only risks .15 and has to ability for gains up to 2.85 if the stock is at or below $62 on next Friday’s expiration. We still have risk of losing the cost of this put spread so we haven’t “locked in” profits. But it is worth far more than what our risk is and has a great risk reward profile into earnings.