If there were any doubts both Wall Street and Main Street enjoy Walmart Stores (NYSE:WMT), those worries were laid to rest following the retailer’s latest earnings report. But for price-sensitive investors interested in shopping today, a bullish options combination on WMT stock looks like “merchandise” worth buying.
Let me explain.
It turns out investors and consumers are willing to shop somewhere other than Amazon (NASDAQ:AMZN). Thursday’s second-quarter results from WMT stock, which featured top- and bottom-line beats, estimated e-commerce revenues of 40% for 2018 and Walmart’s strongest brick-and-mortar sales growth in more than a decade are solid signs Main Street has been shopping at the world’s largest retailer.
And on the price chart, a 9.3% surge in shares of Walmart is solid technical confirmation investors are equally interested in buying WMT stock and won’t be returning that merchandise anytime soon.
WMT Stock Weekly Chart
WMT stock is back in favor on Wall Street. After nearly seven months of badly lagging the broader market, Thursday’s price jump in shares confirmed a deeper and constructive testing pattern is shaping up as a bullish cup-shaped base destined for a breakout to fresh all-time-highs.
Currently, shares of WMT are overbought and profit-taking to diffuse some of that enthusiasm, would hardly be surprising. On a pullback, which could develop as a weekly handle consolidation, the expectation is for the base’s 50% retracement level near $94.50 to hold on any potential testing.
But with WMT’s squiggly price line barely up on the year, still trailing the broader averages, as well as AMZN stock by a massive margin, there is the risk of investors being too cautious in the short-term and missing the boat on a decent entry point in Walmart stock.
WMT Stock: Moderately Bullish Spread
The solution to investors wanting to pick up WMT stock in this technical quandary of sorts is to shop WMT’s options market for a reduced and limited-risk, long delta position. In early July, I detailed an intermediate-term Dec $90 / $97.50 bull call spread in WMT stock. The vertical is now fully in-the-money and up roughly 125%.
One unorthodox combination that looks attractive for cost- and risk-conscious shoppers is selling the Sept $95 / $92.50 put spread and purchasing the Sept $100 / $105 / $110 call butterfly spread for a small debit of 50 cents with WMT stock at $98.
The put spread is used to finance the cost of the slightly above-the-market call butterfly. The $95 strike put is strategically placed near technical support discussed above.
If our forecast proves misplaced, this trader’s risk is just 3% and one-third of Thursday’s bullish price gap. That’s a nice insurance policy in the event the gap gets filled (or worse). This may also help investors with accumulating WMT stock on extreme weakness.
On the other hand, if a breakout of WMT’s cup-shaped base proves correct, the butterfly is in a nice position to capture the first part of a larger rally with a profit zone in-between $100.50 to $109.50. And while there is the risk of a loss with this strategy if Walmart rallies too strongly, for a shorter-term play outside of the next earnings catalyst, I’m confident this spread won’t lead to a case of buyer’s remorse anytime soon.
Disclosure: 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.
