Walmart Inc (NYSE:WMT) reported earnings this morning and after going mildly green, has now dropped more than 1%. While that is not great, it’s much better than the J. C. Penney Company Inc (NYSE:JCP) -11% reaction. I am already long WMT and I want to add to my exposure now that this headline has passed.
WMT management has always been under pressure to improve its employer terms. Perception is that it’s unfair, but that is the nature of them being so large. Last year they took many drastic and costly steps to show the world that it does care about its workforce, but it also remained focused on its low price leader strategy.
I shop at WMT because if I find what I need then I know it’s likely that I paid the cheapest price possible. I’ve recently bought a set of 33-inch tires for my teenage son’s truck. They delivered them for free. It was a third-party seller who sold me those tires with walmart as the gateway.
I shared this story as proof that there is room for WMT to prosper along side the gorilla that is Amazon.com, Inc. (NASDAQ:AMZN). I think that there is room for both to prosper. I’ve even shopped Walmart through Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) Google Express online shopping service.
The point is that WMT management is still executing well on its strategy. Their stores still need a lot of improvements, but that is the operational side which will eventually fall in line. The important thing is that the company is adapting to the new world of retail and its likely to be dominant for years to come. Case in point is their recent investment in FlipKart. Overnight they now are the Amazon of India, which is a massive market.
Fundamentally, WMT sells at a 26 price-to-earnings ratio which is not a screaming deal but it’s not bloated either. Nevertheless, Walmart stock has been under tremendous pressure for weeks so it already shed a lot of froth in the process. So I am confident that if I own the shares at a discount from current price I would manage out of them for a profit. And therein lies my opportunity.
Instead of risking $86 to buy the shares and leaving no room for error, I will sell downside risk into support. This will generate income out of thin air with a big moat around my position.
Coming into the earnings report, the stock showed upside pressure to $89 per share. For more on this click here for the details on support and resistance, and to get an ongoing free copy of my weekly newsletters.
WMT Stock Trade Ideas
The Trade: Sell WMT Sep $77.50 put and collect $1.50 per contract to open. Here I have a 85% theoretical chances that price will stay above my level. Else, I will accrue losses below $76.
Selling naked puts is daunting. Those who want to mitigate that risk can sell spreads instead.
The Alternate Trade: Sell the WMT Sep $77.50/$75 credit put spread, which would deliver over 12% in yield but with much smaller risk. Both set ups have about the same odds of success and neither require a rally to win.
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 as @racernic on twitter and stocktwits.