When a stock has trouble getting above a resistance area, it’s usually for a reason. Maybe the stock is overbought, or maybe the general market has kept the stock from moving higher.
Here is a trade idea on a stock that many traders thought could have been overbought and maybe needed to retrace some. In addition, the market has been less than bullish as of late, but this stock refused to fall and now is looking to keep on moving higher.
Wal-Mart Stores Inc. (WMT – 69.72): Long Calls
The trade: Buy the August 67.5 calls for Wal-Mart (NYSE:WMT) for $3 or less.
The strategy: The long call (can profit if stock rises) is a pretty straightforward option strategy. The trade can profit if the stock rises and the call premium increases to an amount more than was paid. Maximum profit is unlimited because WMT can continue to rise, and the maximum loss is $3 or whatever was paid if WMT finishes below $67.50 at August expiration. Breakeven is $70.50 at expiration based on a $3 purchase.
The rationale: Most people are quite familiar with Wal-Mart, even if they do not shop there. That can be a good thing for the stock. Even though the company has relatively low profit margins, it generally has decent revenue growth and good cash flow from operations. More than a few analysts rate the stock as a buy.
Looking at Wal-Mart’s chart, the stock on Friday broke above a resistance area that had been holding it back from heading higher for about three weeks. It is now trading at its all-time high. Now it has nothing but blue skies overhead. Don’t be surprised if the stock dips a little before possibly moving higher. Many stocks will do this once an area of resistance is broken and held.
WMT likes to drop its prices, but it doesn’t look like the stock will be dropping much anytime real soon!
As of this writing, John Kmiecik did not hold a position in any of the aforementioned securities.