Put Down Wal-Mart for a Breather

by John Kmiecik | May 29, 2012 8:11 am

It’s hard to imagine many stocks making a bullish run in this market setting. But there are a few, and one in particular looks ripe for a possible short-term reversal. Knowing that the stock chart might give a trader a sign about a bearish entry will be crucial. Here is a trade idea that might just be able to profit if that bullish run comes to an end.

Wal-Mart Stores (WMT — 65.31): Long Puts

The trade: Buy the July 65 puts for 1.60 or less.

The strategy: The long put is a strategy that can be used for a bearish outlook on a stock. The trade can profit if the stock falls and the put premium increases as the option moves farther and farther in-the-money (ITM). Maximum profit is almost unlimited only because the stock can only fall to $0 (which is highly unlikely) and the maximum loss is $1.60 if Wal-Mart (NYSE:WMT[1]) finishes at or above $65 at July expiration. Breakeven is $63.40 at expiration.

The rationale: WMT generally is liked by analysts, and after reporting better-than-expected earnings recently, the stock is at a 12-year high. So why a bearish play? With all the recent good news, there still is a scandal hanging over the heads of Wal-Mart’s chief executive and others about an alleged $24 million in bribes made in Mexico.

Besides the scandal, the stock recently has climbed from just above $59 to where it currently is trading. That is a pretty extended move, especially for WMT. This is a speculative play based on the theory that the stock has gone higher seven days in a row and might need a breather. Look for a possible quick move down on maybe some profit-taking. A bearish sign would be if the stock could trade under Friday’s low, which was $64.80.

As of this writing, John Kmiecik did not hold a position in any of the aforementioned securities.

  1. WMT: http://studio-5.financialcontent.com/investplace/quote?Symbol=WMT

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