The retail battle between online and traditional is narrowing down to a few players. It’s now between a few traditional players like Wal-Mart Stores Inc (NYSE:WMT) versus Amazon.com, Inc. (NASDAQ:AMZN) who has inflicted tremendous damage already and shows no signs of slowing down.
WMT management has so far staved off the devastating effect of AMZN, but they are not sitting idle. There are visible efforts that they are positioning themselves for the new retail normal. The AMZN/Whole Foods Market, Inc. (NASDAQ:WFM) deal opens yet another front in the battle, and that one is aimed at the grocery section inside WMT stores.
Today I want to trade the shorter-term price action in Walmart stock by using the value of the company. I will sell premiums to create income out of what others fear and what is not likely to occur.
Click to Enlarge WMT is the original king of low margins. Well before AMZN started its onslaught, Walmart was the evil retail giant smashing local businesses. So it’s no surprise that it’s a leader in the fight today. Low margins are not going to damage the company as it did for traditional brick-and-mortar. So they merely need to combat the convenience and ubiquity portions of AMZN’s attractions.
Fundamentally, WMT sells at a price-to-earnings ratio under 20 and a price-to-book of 3. So owning it at even lower levels than current is not likely to be a major mistake. This is important for my strategy today, as I will commit to owning shares if price goes against my trade.
Technically and in July, the stock rallied 12% off a double bottom but has recently given back some. WMT stock has fallen 5% since its high on Aug. 9. Although this might not be the absolute bottom in this dip, I am willing to place a bullish bet today.
No, I am not going to buy the stock outright and hope for a rally. Instead and since they don’t ring bells at tops and bottoms, I will use Walmart options so I can create some sort of a buffer zone.
WMT Stock Trade Idea
The Bet: Sell WMT Sept. 29 $76 put and collect 70 cents per contract to open. This trade has an 85% theoretical chance of winning. But if price falls below my strike then I have to own the shares and could suffer losses below $75.30.
Traders who want to limit the risk from selling naked puts can use spreads instead. Selling a spread carries smaller more finite risk which better suits small accounts or more conservative investment tastes.
The Alternate Bet: Sell WMT Sept. 29 $76/$75 put spread which will yield 15% on risk if successful.
In either of these trades I don’t need a rally to win. In fact WMT stock can fall 3% and I can still take in max gains.
Investing in stocks is risky so I never bet more that I can afford to lose.
Learn how to generate income from options 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.
