Wal-Mart Stores Inc (NYSE:WMT) is a giant of retail, but the past 12 months have seen Walmart stock move sideways. The fundamental story hasn’t changed much — Walmart’s management is still sticking with its low-price leader strategy. It’s made an effort to ameliorate the public perception of fair pay to its employees, but it remains a dinosaur in a sector marred by Amazon.com, Inc. (NASDAQ:AMZN).
Before AMZN, WMT was the king of low margins. This perhaps minimized the Amazon effect on it. Otherwise, AMZN demolished the rest of the sector.
Click to Enlarge Technically, the weekly chart points out two areas where Walmart stock didn’t belong. Those were upside and downside overshoots. Somewhere in the middle lies the truth. Focusing on that, I see a clear channel slightly descending, but not alarmingly so.
Most traders risk money based on price targets. I find it easier to identify areas where price is not likely to go and sell risk there. In WMT’s case, and as long as equity markets don’t collapse, I can generate income from selling downside risk below proven support in Walmart stock.
The Bet: Sell the WMT Oct $60 put naked for 80 cents. This trade has a 90% theoretical chance of success. If WMT stock falls below the strike price, you will have the stock put to you (meaning that the buyer of the put will have the option to sell it to you at the strike price). Anything below $59.20 per share would accrue losses.
Usually, I like to sell upside risk to balance my trade, but in this case, I feel comfortable that I would be able to manage my risk against the short-term price gyrations. Selling naked puts is risky and is not suitable for all trades. I can change my trade to make it more palatable to more investors.
The Alternate: Sell WMT Oct $60/$55 credit put spread. This is also a bullish trade that has a 90% chance of delivering 8% yield on risk.
Learn options as easy as 1-2-3 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.
