The retail sector is not usually a momentum trading vehicle. Headlines from Amazon.com, Inc. (NASDAQ:AMZN), however, have transformed it into one. Recently, we saw a crash that persisted for a few days before partially whipsawing to recovery, regaining about half its lost value.
The SPDR S&P Retail (ETF) (NYSEARCA:XRT) is down about 20% since its December 2016 high, but it has recently set an interim bottom in price-pattern terms. It has bounced off $38.80 on two tests. These can eventually turn out to be a temporary double bottom from where the retail sector can repair some of the technical damage it incurred. That said, I’m not saying that I’m mega bullish on the sector.
Wal-Mart Stores Inc (NYSE:WMT), being the retail behemoth that it is, did not sit out the recent excitement. WMT stock recovered almost half of the 8% correction it recently suffered. But technically, it sits just below the open gap chasm from June 16. While markets usually like to fill open gaps, this one could have some resistance built into it.
Back in May, WMT stock spiked to the $79 area too quickly. This made for weak hands who, on the first sign of trouble, bailed on their profits. So it will take another specific reason for them to jump back in as fast.
Click to Enlarge While I sound bearish Walmart, my thesis for trading WMT stock today is bullish. But not in the sense that I expect a big rally from here. I like to sell risk below value for income, and with WMT at an 18 price-earnings ratio is what I consider value.
This is about one-third less than that of Costco Wholesale Corporation (NASDAQ:COST), which is also a value stock in my book.
So instead of chasing a price higher, I’d much rather own the value. Meaning I’d risk owning WMT shares at a discount, especially if someone pays me for this opportunity. In essence, I generate income by selling downside risk against what other traders fear.
How this works is that I sell puts below a level where I want to own WMT stock. If price falls below it then I own the shares. Otherwise I keep the premium as income.
It would take a serious change in fundamentals for WMT to become a giant mistake at a 9% discount from today. So this is the definition of a calculated risk that I am willing to bear. I am confident that I can manage my exposure against the short-term price action with this size buffer.