Wal-Mart (NYSE:WMT) shares have been on technical layaway in recent weeks. But in our estimation, that should prove to be a nice pre-holiday gift for a free bullish options combination spread on WMT stock. Let me explain.
Since reporting a solid and very-well-received earnings report in mid-August, there’s been some returning of merchandise by Wall Street. WMT stock is off about 2.7% from its post-reaction close. But that’s actually not anything to be overly concerned about. Nor is the doom and gloom from today’s headlines warning of the impact of tariffs on consumers and businesses or maybe how Amazon (NASDAQ:AMZN) is going to crush the competition this holiday season.
Bottom line (or in this instance, the squiggly price line), WMT shares have remained more than 6% above their pre-earnings price without ever coming close to filling the price gap and testing Walmart bulls’ intestinal fortitude. That’s bullish, plain and simple.
As such, it’s our contention the price action in WMT stock has been akin to layaway buying by smart-money operators in front of the all-important retail selling season for the company and a breakout buying season for WMT investors.
WMT Stock Weekly Chart
Technically, Walmart has been busy making all the right moves over the past several weeks with higher prices increasingly likely to follow. As discussed back in mid-August WMT stock did hold the 50% level of its cup-shaped corrective base. I’ll take a pat on the back for that technical call.
What I didn’t expect was the bullish support in Walmart shares would take on the shape of a small “W” or handle consolidation. It’s a pattern hinted at above that I’ll describe as supportive, but stealthy, layaway buying in front of other investors picking up shares more aggressively during a breakout phase in WMT.
WMT Stock Bullish Spread Combination
WMT’s price action of the last several weeks, while certainly constructive, did put the kibosh on a bullish September-dated spread which cost about 0.5% out-of-pocket.
Reviewing WMT stock’s options board for fresh ideas, I do see a gift for bulls in front of the Christmas holiday. Today’s combination enjoys an earnings catalyst — an anticipated strong retail selling season for Walmart — and won’t cost bullish investors a cent to enter.
The strategy involves selling the Dec $95/$92.50 put spread and buying the Dec $105 call for even money or better. The put vertical finances the entire price of the long call. I like this position for a couple reasons.
First, while the put spread’s risk isn’t far removed from WMT stock’s current price of $95.90, the exposure is less than 3% of owning shares and is mostly below what’s viewed as a sturdy technical platform.
Secondly and as mentioned, the “free” call does enjoy a couple strong events during its life cycle. Further, the $105 call strike is placed below a cup-shaped pattern breakout through the high near $108 and would already be worth $3.00 or more in profit if a technical challenge took place prior to December expiration.
Lastly, bullish traders can always look to adjust the position as the price action in WMT stock unfolds. If shares fail to hold support, risk is limited but exiting for a potentially much smaller loss can’t be faulted. On the other hand, if Walmart puts a smiley face on other Walmart investors, there’ll be plenty of options, pardon the pun, for this bull to profitably adjust with as well.
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.