After a long spate of weakness, Wal-Mart Stores Inc (NYSE:WMT) is beginning to flex its muscles. The ubiquitous discount retailer is now up 13% year-to-date. Compared to the S&P 500’s 8% gain, we’re talking about some decent outperformance for WMT stock.
Spectators waiting for a quality setup before scooping up Walmart shares don’t need to wait any longer. Since blasting higher on earnings, WMT has settled into a nice little bull flag pattern.
And speaking of earnings, the past two announcements deserve praise for infusing strength back into WMT. Both quarterly reports sparked sharp price jumps in the stock and increased the momentum of its newfound uptrend.
Walmart stock now sits atop rising 20-day, 50-day and 200-day moving averages. And despite six days of selling, Walmart hasn’t given back hardly any gains at all. Shallow pullbacks are the hallmark of healthy stocks.
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Volume patterns have also been backing the bulls of late. A groundswell of buyers sallied forth following the mid-May earnings release.
And while WMT has receded in recent days, participation has been very subdued. No distribution days have cropped up to scare the children.
WMT Stock Calendars
On the options front, prices remain depressed. The post-earnings volatility crush has been in full force over the past two weeks carrying the implied volatility rank back down to a lowly 10%. With call options now being offered up on the cheap, a long premium play may be the way to go.
Rather than purchasing call options outright, let’s hedge our bet a bit by entering a calendar spread. We will buy a longer-term in-the-money call option to establish our bullish bias, but simultaneously sell a short-term out-of-the-money call option to reduce the overall position cost.
Buy the July $75 call option and sell the June $79 call option for a net debit of $3.33. The initial cost represents the max loss and will be incurred if WMT sits below $75 at July expiration. If the stock rests near $79 at June expiration, the trade should deliver a gain of $50 to $90. That translates into a potential return on investment of 15% to 27%.
At the time of this writing, Tyler Craig held no positions in any of the aforementioned securities.
