It’s been a nice and, of all things, “trendy” 2016 for Wal-Mart Stores, Inc. (NYSE:WMT). But given Wall Street’s fickle nature and less-than-opportunistic WMT price chart, it’s time investors shop for a drop with an attractive bearish butterfly put strategy.
Walmart was one of 2015’s most maligned large caps. Weak earnings and the rising cost of business as a bricks and mortar establishment and retailer trying to grow its online presence against the likes of ecommerce behemoth Amazon.com, Inc. (NASDAQ:AMZN) made for trying times.
At its worst, shares of WMT fell more 38% from its early January 2015 all-time-highs. And to finish off the year, it wasn’t much better with Walmart shareholders out 33% on paper.
Adding salt to the wound of WMT shareholders, the S&P 500 managed to pull together a scant loss of less than 1% during a volatile 2015 — and this coming despite Walmart stock’s historical, below-market beta.
On the other hand, 2016 has been quite the turnaround for WMT both off and on the price chart.
Whether last year’s woes are attributed to short-term memory disorder, a fearful overreaction by investors or Walmart’s wherewithal to navigate some market challenges and surprise the Street, the result has been impressive.
In 2016, WMT has put together a gain of about 21% that’s bested the broader market by more than threefold. Unfortunately, bygones may not entirely remain bygones as shares face a legitimate challenge to this year’s trendy price run.
WMT Stock Weekly Chart
Taking a look at WMT stock’s weekly chart, it’s easy enough to see 2016 has been in stark contrast to 2015 — much to the delight of the buy-and-hold or hope crowd.
Looking forward though, WMT appears to be in strong position for profit-taking and perhaps more bearish pressure.
Walmart stock’s rally in 2016 has now placed shares up against a formidable resistance zone comprised of a 50% retracement and shareholders possibly now “looking to break even.”
Regarding the latter, WMT is facing a large congestion pattern from the spring of 2014 to fall of 2015. The prior bullish pattern ultimately failed and has shown its influence, most recently and highlighted in yellow, as resistance, for Walmart stock.
Coupled with an overbought stochastics condition in Walmart stock, the technical case for modest profit-taking of around 5% or to the $70 area builds.
Further, if recent shoppers or pressure from the “looking to breakeven” crowd weighs in, a corrective move of 10% near $66 and gap fill could be in the offing.
WMT Long Bearish Butterfly Strategy
Reviewing the WMT options board, the August $72.50 / $70 / $67.50 put butterfly is interesting. Priced for 30 cents, the limited-risk spread is positioned to maximize its profit of $2.20, or return of 733%, at $70 in Walmart stock.
The trader’s breakeven range at expiration is from $67.80 to $72.20. The low end of profitability is structured above the discussed 10% pullback, but is sufficient to capture a return if WMT shares fall as much as 8%.
Bottom line, with the low-cost position also expiring shortly after Walmart releases its next earnings report in mid-August and having that event act as a bearish catalyst — shopping for a drop in WMT won’t cost much and this spread trader is positioned to ring the register in a big way.
Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.
