Walmart (WMT) FQ2 Earnings Preview & Hedge Idea

by Dan August 16, 2017 2:31 pm • Trade Ideas

Tomorrow before the open Walmart (WMT) will report their fiscal Q2 results. The options market is implying about a 3.7% one day move, which is a tad rich to the 2.5% one day post earnings move over the last four quarters, but basically in line with the 10-year average. WMT is one of the few bricks and mortar retailers whose stock is positive on the year, let alone out-performing the S&P 500 (up 17% vs 10.4%).

WMT’s stock has had a volatile couple months since making new multi-year highs in early June. The stock declined sharply following Amazon’s (AMZN) $14 billion bid for The Whole Foods Market (WFM). Since bottoming in early July, the stock made a new high and has spent the last week consolidating at new highs.


The stock’s strength is truly astounding when you consider just how poorly the sector acts, with the XRT, the S&P Retail etf making new 52 week lows yesterday, down more than 20% from its 52 week highs:


So what’s the trade?

If I were long WMT I might consider a short dated collar to protect year to date gains.

Defensive Trade Overlay. Vs 100 shares of WMT long at $81 – Buy Sept 77.50 / 80 collar for 25 cents

-Sell to open 1 Sept 85 call at 50 cents

-Buy to open 1 Sept 77.50 put for 75 cents

Break-evens on Sept Expiration:

Profits of stock up to 85, up 5% from current levels, so max gain $3.75 ($4 less 25 cents premium paid). If the stock is 85 or higher stock is called away on Sept expiration, but one could always cover the short call to keep the position intact.

Losses in the stock from 81 down to 77.50 of up to 3.50 (plus the 25 cents premium paid. Protected below 77.50

Rationale: If you are looking for ways to lock in a certain amount of the stock’s recent gains, and willing to give up gains above a certain point, this strategy makes sense.