The new year could be a rough one for Wal-Mart Stores, Inc. (NYSE:WMT) and other brick-and-mortar retailers. Not only are they seeing their worst foot traffic since 1972 as Amazon.com, Inc. (NASDAQ:AMZN) flexes its online muscles, but President-elect Donald Trump has said that he is considering an executive action to impose a 5% tariff on imports — news that sent WMT stock plunging last week.
And we haven’t even touched on Trump’s increasingly rocky relationship with China, which threatens to kick off a trade war with one of the largest suppliers of cheaply manufactured U.S. imports — and one of the largest holders of U.S. debt.
The wealth of pressure facing Walmart stock has already sent analysts running for the sidelines. According to data from Thomson/First Call, 21 of the 30 analysts following WMT stock rate the shares a hold or worse.
Meanwhile, the 12-month price target rests at $74.59, representing a premium of about 7.91% to yesterday’s close. Should Trump impose his tariff, or Amazon continue to take market share, we could see more analysts revise their outlooks downward. That would pile additional pressure on Walmart stock.
Elsewhere, Walmart short sellers smell blood in the water.
During the most recent reporting period, WMT edged out Procter & Gamble Co (NYSE:PG) as the 12th most shorted stock on the Dow Jones Industrial Average. Some 28 million shares of WMT stock are now sold short, representing about 2% of Walmart’s total float. Look for shorting activity to pick up sharply if Trump gets his way.
As a clear sign that short sellers are not worried in the least about a potential WMT rally, options activity has grown increasingly put-heavy. Currently, the January/February put/call open interest ratio stands at 1.26, with puts easily outnumbering calls among short-term options. Typically, short sellers will buy up calls as a hedge against potential rallies in the underlying stock, but this is far from the case with WMT.
Click to Enlarge Looking out to the February series to judge the potential impact of an incoming Trump presidency, implieds are pricing in a potential move of about 3.6% for WMT stock. This is more inline with implieds surrounding an earnings report than the stock’s historically lower volatility readings.
As a result, the upper bound lies at $71.24, while the lower bound lies at $66.26. Technically, the upper bound lies well short of recent resistance near $72, while the lower bound rests well below key short-term support levels and WMT stock’s October lows.
What does this mean for those looking to trade?
2 Trades for WMT Stock
Put Spread: Headwinds abound for WMT stock, and unless Trump promises to not impose a tariff (or Congress decides to act for once), the path of least resistance remains to the downside. Traders looking to bet against WMT heading into the early days of 2017 might want to consider a Feb $67.50/$70 bear put spread.
At last check, this spread was offered at 95 cents, or $95 per pair of contracts. Breakeven lies at $69.05, while a maximum profit of $1.55, or $155 per pair of contracts, is possible if WMT stock closes at or below $67.50 when February options expire.
Call Sell: If betting directly against WMT stock makes you nervous, a Feb $75 strike call sell position may fit the bill. Such a trade is especially useful if you already own WMT stock, as it allows you to offset some of your portfolio losses in the event of a selloff, but also allows you exposure to any upside up until the stock trades at or above $75.
At last check, this option was bid at 23 cents, or $23 per contract. A sold call allows you keep the premium as long as WMT stock closes below $75 at expiration. On the downside, if WMT rallies above $75 prior to expiration, you could be forced to provide 100 shares at current market value for each call sold. That could be quite costly if you do not have enough stock on hand to cover the call.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
