Walmart (WMT) popped after its better than expected Q4 report in late February. After that move we detailed a bearish trade looking for a near term pullback to the 70 level (by today) that would then allow for a roll to capture further downside if this level doesn;t hold. Here was the original trade and rationale, from Feb 21st:
WMT ($71.60) Buy the March3rd/May 70 put calendar for 1.65
- sell 1 March 3rd (weekly) 70 put at .25
- buy 1 May 70 put for 1.90
Rationale – This trade starts off mildly bearish, looking for a failure of this earnings pop back to 70. The ideal situation is for the stock to be at or near 70 on March 3rd, at which point the short March 3rd 70 puts can be closed and rolled farther out.
With the stock 70 today on March3rd expiration it could not have worked out better. The current value of the trade is 2.65 vs the original 1.65. That’s a dollar profit which can of course be closed today for a nice profit. But what about those that want to keep short exposure?
Let’s look at a roll. The March3rd 70 puts can be closed for .10, they can then be rolled out to continue the position while reducing the original premium risk:
UPDATE – WMT ($70)
- buy to close the March3rd 70 puts for .10
- sell to open the March31st (weekly) 67.5 puts at .55
New Position – Long the March31st 67.5/ May 70 diagonal put calendar for 1.20 (currently worth 2.20)
Break-even/Rationale – This roll of the short put reduces the original cost to 1.20, the ideal situation is for the stock to continue lower towards the 67.50 level by the end of March. Even if the stock gaps lower through that strike the position will make 1.30. If the stock bounces from here there are losses, but it is risking less, and the March 67.5 puts would decay much faster than the May 70 puts, meaning even with a small bounce the trade will still be in good standing. The big risk is a big move higher, but only 1.10 is at risk now versus the 1.65 originally at risk. This is not booking profits, the current profits are represented in the 1.20 cost basis, vs the current value mark to market of that trade of 2.20. For those looking to take profits the existing trade can simply be closed.
The roll out of the short puts and down 2.50, a little less than a month out (to March 31st) keeps the optionality of the trade as it can make money several ways either with a swift move lower in March, a slow move or sideways in March in which we can roll the short portion again, or even a small bounce where the trade will still be in decent shape with 1.00 of profits mark to market and a chance for further declines all the way out til May expiration.