Event: Walmart (WMT) is scheduled to report their Q3 results on November 17th before the open. The options market is implying about a 4% move in either direction between now and Nov 18th expiration close. The Nov 18th 69.50 straddle (the call premium + the put premium) is offered at about $2.80 with the stock at $69.50, if you bought that, and thus the implied movement you would need a rally above $72.30, or a decline below $66.70 to make money. The average one day post earnings move has been about 4.5% over the last 4 quarters, but that includes a nearly 10% rally in May, while the 10 year one day post earnings move has been only about 2.5%.
The stock is down a few percent since their annual analysts meeting where the company gave downbeat forward guidance that highlighted their increased focus and spending on ecomerce, per WSJ.com:
executives said Wal-Mart would open only about half as many supercenters next year as it did last fiscal year. Instead, Wal-Mart will direct more of its $11 billion in annual capital spending toward boosting e-commerce sales, technology used in stores and customer service.
Wal-Mart has already invested billions in online efforts, as well as higher wages for store workers—efforts executives have said would depress profits for years. Last month, Wal-Mart spent $3.3 billion to buy unprofitable online retailer Jet.com Inc., and on Wednesday it disclosed it had nearly doubled its investment in Chinese online retailer JD.com Inc.
This spending both here and abroad comes with no guarantees that the company will be able to re-accelerate sales growth and finally hit $500 billion as the company has been bracketed between $465 and $485 billion in annual sales since 2012.
The company has an annual dividend yield of nearly 3%, which may help buffer investor concern as they lower their dependence on super-centers and push deeper into ecomerce to compete with Amazon, and invest greater in JD.com to compete with Alibaba in China. This may be an expensive transition, with very uncertain results when you consider who they are competing with in both regions.
The technical set up in WMT is kind of intriguing, as the Oct 6th gap following their analyst meeting placed the stock below the uptrend that has been in place since late 2015, and now attempting to retake the $70 level, which served as near term technical resistance back in May:
Taking a slightly longer term view, it becomes clear that $70 to $75 is formidable technical resistance range, while $65 could be near term support:
So What’s the Trade?
Nov vol is pretty pumped. And that offers some opportunity for vertical calendar spreads that should offer better odds of success than buy straight November direction spreads. Here are two examples:
WMT (69.70) Buy the Nov 73/ Dec 70 call calendar spread for 1.30
- Sell 1 Nov 73 call at .27
- Buy 1 Dec 70 call for 1.57
Rationale – This sells a an out of the money November call at 26 vol, just outside the implied move and buys an at the money call in December at 20 vol. The most it can lose is 1.30 if the stock is below 70 on December expiration. But on any move higher within the implied move this trade will do well as the November calls will expire worthless, leaving the December calls to be spread or closed for a profit. This trade is long about 30 deltas.
WMT (69.70) Buy the Nov 65/ Jan 67.5 put spread calendar for 1.30
- Sell 1 Nov 65 put at .25
- Buy 1 Jan 67.5 put for 1.55
Rationale – The Nov 65 put sale is 30 vol, the Jan 67.5 put buy is 19 vol. That’s a significant difference. On any move lower this trade should do well with the only risk to the upside.The most that can be lost is 1.30 but not until January if the stock is above 67.50. This trade is -25 deltas.
On both these trades we’re using the difference in vol to set-up a trade structure that’s better than buying high vol in November. In both cases the differing strikes provide enough deltas that they are still somewhat binary so direction is important. But with the split strike calendar method it’s less binary that a straight up vertical in Nov and the differences in vol improve the trades odds off success over time.
If you want to Keep it Simple for a move back to $65 post results, Nov put spreads look like a decent risk reward despite the elevated vol:
WMT (69.70) Buy the Nov 70/ 65 put spread for 1.30
- Buy 1 Nov 70 put for 1.55
- Sell 1 Nov 65 put at .25
Rationale: risk $1.30 (or about 2% of the stock price) to make up to $3.70 if the stock is between 68.70 and 65 on Nov expiration following earnings.
We will be sure to check back prior to results, usually it does not make a ton of sense to place an earnings trade more than a week before results unless you had some sort of conviction on direction leading up to the event.