It’s almost time for investors to go shopping in Walmart Inc (NYSE:WMT). Or is it? The only certainty is an anxiously awaited earnings report for WMT stock is on tap later this week. But for like-minded contrarian bulls who want to bargain shop with a price guarantee ahead of the event, a Walmart bull call spread is the strategy of choice. Let me explain.
To say a lot is riding on Walmart’s Q1 report, due out Thursday morning, is probably one of the larger understatements of the day. After last quarter’s slamming of WMT stock on a mixed report, Wall Street is anxious to see if they collectively got it right or if they’ll be forced to pull a communal about-face and cheer a stronger narrative going forward.
By the numbers, Walmart is forecasted to show profits of $1.12 and above last year’s $1 per share. Similarly, analysts are calling for revenues of $120.47 billion compared to 2017’s first quarter sales of $117.54 billion.
Atop the items to be announced Thursday and most likely to move WMT stock is the company’s e-commerce business. It’s no secret Amazon.com, Inc. (NASDAQ:AMZN) has been an Achilles Heel of sorts for Walmart. Last quarter Walmart’s online business felt the impact as sales grew by a slower-than-expected 24%, which in turn, played a large part in investors’ bearish earnings reaction.
WMT Stock Daily Chart
If you like discounts, WMT stock may be a bargain on the price chart. But is it at a bottom? This strategist believes the odds favor an upside resolution. Be warned though, as there are no price guarantees in the stock market.
For bulls with a contrarian lean, since peaking in early 2018 shares of Walmart have corrected by 25%. The decline fits in nicely with typically healthy drops of up to 30%. Further, corrections of this size generally occur when the narrative is bearish and doubt is immovable.
Finally, WMT’s low is also backed by a couple key Fibonacci levels dating back to cycle lows in 2015 and 2017. Now, with a bullish oversold stochastics setup confirmed by Monday’s reversal of the prior week’s three session candlestick decision pattern; what more could an investor want?
Walmart Stock Long Bull Call Spread
The WMT stock chart is all well and good, but what if investors want more price security in the face of this week’s earnings event? For that we can take a look at Walmart’s options. One short-term positioning idea is to simply buy a slightly out-of-the-money bull call spread.
One favored spread is the May $86/$89 call vertical for 87 cents with shares at $84.39. This strategy makes sense as it vastly cuts down the trader’s Greek risks, limits the absolute dollar exposure to roughly 1% and can provide a solid return on investment if shares are bid higher in the immediate aftermath of the earnings report.
The downside to this strategy is definitely the timing of the move. If Walmart shares fail to move above $86 by this Friday’s expiration, the entire debit will be forfeited. But, knowing the importance of this quarter’s report, I see that as an acceptable tradeoff for the protection afforded by the vertical in the event the price chart gets a good deal worse for WMT stock.
Investment accounts under Christopher Tyler’s management do not currently own positions in any securities mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. . For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.