While there are still some trouble spots in the market, retail spending and consumption look strong, as we mentioned in our recommendation on Nike (NASDAQ:NKE). Earnings in this critical sector have generally exceeded expectations, which could keep the major market indexes above water through the end of the year.
Target’s (NYSE:TGT) earnings report last week included a particularly promising outlook for this holiday season. In fact, we would normally look for a new entry point on TGT after a report like this, but the options on the stock are strangely underpriced. We can get a better return by setting up a bullish trade on Walmart, Inc. (NYSE:WMT), where the same underlying fundamentals are likely to keep the stock above support.
We recommend trading the situation with a bullish put write on WMT.
Taking Advantage of Timing Issues
When WMT reported earnings on Nov. 14, its outlook was similar to TGT’s, with extremely promising growth from online sales. At the time, the stock rallied to a record high, but it pulled back because of trade-related fears and generally poor performance in the market later that same day.
On Nov. 14, the first phase of the U.S.-China trade negotiations had hit a snag because of China’s hesitation to commit to buying $50 billion worth of agricultural products from the U.S. annually. This came after the debate over whether or not the U.S. would lift all tariffs on Chinese goods had already created a stir. Trade was in doubt, and that may have suppressed the performance of the retail sector.
We believe WMT’s performance issue was one of timing. Similar situations in the past have resulted in strong support and higher prices in the short term as investors re-evaluate the good news.
Taking Advantage With an Aggressive Strike Price
As you can see in the chart below, WMT is trending sideways in a rising “wedge” technical pattern. When it appears in a bullish trend like this, a rising wedge usually indicates additional upside potential.
Daily Chart of Walmart, Inc. (WMT) — Chart Source: TradingView
We prefer to open this position with short puts because we collect instant income and the put write provides a hedge if the overall market is uncooperative.
However, because we are quite bullish on the stock, we recommend using an aggressive strike price just above trendline support and near the current price of the stock — $119. This increases the income earned from the trade and our potential gain.
With such an aggressive strike price, it is important that traders don’t over commit with an expiration that is too far out. You don’t want to give WMT a chance to pull back before you’ve collected your profits.
InvestorPlace advisers John Jagerson and S. Wade Hansen, both Chartered Market Technician (CMT) designees, are co-founders of LearningMarkets.com, as well as the co-editors of Strategic Trader.
