$WMT – Price Fixed

by Dan May 20, 2016 10:31 am • Commentary• Trade Ideas

We traded Walmart into yesterday’s earnings (here was the initial trade idea from April 29th, here was the trade management from May 13th, here was the exit from May 18th, and here was the post mortem yesterday).  Not a bad bit of trading, and with the stock now approaching $70, up 10% in two days, I think it’s safe to say that just like in life, sometimes its better to be lucky than right in trading.

So here is my take on WMT’s quarter just reported. Expectations were very low heading in given the weak results and guidance from most of their peers. The stock had sold off in sympathy with peers like Costco (COST) and Target (TGT) to the tune of 9% in the week prior to results. But were the results really worthy of the 10% two day move?  WMT reported at same store sales comp of 1%, yep 1%. EPS was down 5% year over year, and sales grew a mere 1% yoy. Oh, and for those of you who think that WMT’s investments over the last couple years in their website to better compete with online sales with Amazon (AMZN) is finally paying off? Well, the company posted their lowest quarterly online sales growth in two years of just 7%, per Bloomberg:


I am really not sure what the euphoria is all about. So this time I am going to attempt to be good as opposed to just lucky.  The next identifiable catalyst for WMT will be fQ12 results on August 18th. I want to target a sell off in the shares back towards the mid $60s between now and mid July, deliberately missing the earnings event.

The chart of WMT appears to be at an inflection point. If it were to breakout here, and establish a new range above massive technical resistance at $70, then a near term bottom could be in, until earnings in mid August. But if the stock is rejected at $70, and money were to flow out of WMT and possibly back into some of its beaten up peers, the stock could easily back in the mid $60s:

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

My Take: WMT trades at just below a market multiple, and their 2.9% dividend yield for a defensive retailer may certainly be viewed as attractive, but I am not certain that in a perceived rising rate environment with recently weakening job data and increasingly inflation that WMT will be able to continue to maintain the recent cost controls at a time when AMZN’s North American sales were up 28% in the quarter just reported.

So what’s the trade?  

*WMT ($69.85) Buy July 70/65/60 Put Butterfly for $1
  • Buy to open 1 July 70 put for 1.90
  • Sell to open 2 July 65 puts at 55 cents each, or $1.10 total
  • Buy to open 1 July 60 put for 20 cents

Break-Even on July expiration:

Profits: up to 4 between 69 and 61 with max gain of 4 at 65

Losses: up to 1 between 69 and 70 & between 60 and 61, max loss of 1, or 1.4% of the stock price above 70 or below 60.