Wal-Mart Stores Inc (NYSE:WMT) is one of few retailers who is still doing well in the age of Amazon.com, Inc. (NASDAQ:AMZN). Most other bricks-and-mortar stores are dying on the vine scrambling for market share.
Technically, WMT stock comes into earnings this week equidistant from its two-year highs and lows. I am a believer that markets overshoot on the way up and down. In Walmart’s case, this was clear to see on the chart — the price is in perfect balance relative to the extremes.
Click to Enlarge Since the fundamental story for WMT stock is still as solid as ever, I am willing to take a risk on the long side even going into the uncertainty of earnings.
I am a conservative trader, so I won’t risk $76 per share to buy WMT stock outright and with no room for error. Instead, I will use options to generate income from selling risk against support.
The idea is not new, as I’ve demonstrated how easy it was back in March when I shared a trade that delivered profits with zero out-of-pocket expense.
To me, Walmart’s strength is in its simple goal to be the low-price leader. I don’t hear as much about new efforts to improve its image, so management is focused on better execution of the plan at hand.
The Trade: Sell WMT Dec $60 put and collect 50 cents per contract. With a 20% price buffer this trade has a 90% theoretical chance of maximum gains. If price falls below $59.50, I would accrue losses from having to own the stock.
It is important to note that I am not chasing a price target since I just need WMT stock stay above my sold put to win. I am collecting a premium for the opportunity to own WMT stock at a 20% discount from the current price. In essence, I am selling someone a bearish WMT lotto ticket that will be a loser for them by design.
Selling naked puts is not suited for all traders so to reduce the size of the risk I can change this setup to be a credit put spread instead, and it wouldn’t require a lot of compromise.
The Alternate: Sell the WMT Dec $65/$60 credit put spread which has a slightly smaller price buffer but still could yield 8% on risk. Compare that with buying Walmart stock at $76 and needing it to rally 8% more to match the performance of the spread.
Learn how to generate income from options here. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernic and stocktwits at @racernic.