One of the quickest ways to identify what’s moving on the Street is to sort your watch list by percentage change. I did just that after Monday’s trading and discovered that Wal-Mart Stores Inc (NYSE:WMT) shares are percolating. WMT stock was able to rally a respectable 1% while the S&P 500 closed unchanged.
Indeed, the storm clouds hovering over the ubiquitous retailer following Amazon.com, Inc.‘s (NASDAQ:AMZN) acquisition of Whole Foods Market, Inc. (NASDAQ:WFM) seem to be dissipating.
So if you’ve been waiting for signs that WMT stock was on the mend, wait no longer. A breakout is brewing, and despite the improvements in technical posture, fear in Walmart options is still elevated. That makes an interesting opportunity for selling puts.
More on that in a minute, but first let’s chronicle Walmart’s recovery efforts.
Walmart’s Stock Charts
In sizing up the impact of last month’s price plunge following the Amazon news, it’s obvious that Walmart’s daily trend suffered a reversal. But this is where taking a step back and viewing things from a weekly perspective comes in handy. It tunes out the noise and provides greater clarity of the bigger picture.
While the daily trend was dealt a blow, the weekly survived the selling with uptrend intact. In fact, the June turmoil was nothing more than a garden-variety retracement.
Click to Enlarge
On the bright side, it allowed WMT stock to work off the overbought conditions that had arisen following its strong run earlier in the year.
Interestingly, the retreat carried shares directly to the rising 20-week moving average as well as a critical resistance level. As is often the case, buyers swooped in to turn old resistance into new support. Bulls now remain in control of this longer time frame as long as WMT remains above $74.
The strength over the past two weeks has helped to neutralize the downtrend that had taken root on Wal-Mart’s daily chart.
Click to Enlarge
WMT keeps knocking on the door of the 50-day moving average, like a persistent salesman. And despite the multiple rejections I suspect success is one more knock away. Unlike its last few attempts, this time Walmart stock is attacking the 50-day after pausing for six days.
That means it should have plenty of gas in the tank.
Furthermore, Walmart’s momentum is on the rise. The RSI indicator just tagged its highest level in six weeks at 56, suggesting this rally has decidedly more oomph than the last few.
A pop above the 50-day ($77) has the potential to fill the gap created last month. That would propel the stock back up to $79. A breach of $75.50 would invalidate the breakout setup and warrant some re-assesment.
Get Paid to Shop WMT Stock
Although demand for options has ebbed over the past week, it remains elevated. The current implied volatility rank is 51% (not shown), which means premium sellers are being paid a pretty penny right now.
To capitalize on the juiced-up prices as well as a slightly bullish bias for Walmart, sell the Aug $74/$71 bull put spread for 42 cents or better. Consider it a bet that WMT stock will sit above $74 at Aug expiration (24 days from now). If it does, you’ll capture the 42-cent reward.
The cost of the position is equal to the max risk of $2.58. To incur the max loss, Walmart would need to fall below $71 by expiration. A key support level rests at $73, so I suggest exiting the spread if we take that out to reduce the loss.
Given current option pricing, the market is saying this spread has a 76% of generating the maximum profit at expiration.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities. Want to learn how to master the art of option selling for high-probability cash flow? Check out Tyler’s recently released video series through Tackle Trading on how to systematically sell iron condors for monthly income.
