Walmart (WMT) stock saw large and unusual call buying yesterday — and the trading might portend a big move higher in WMT in coming days.
The most notable movement came in the Oct $68 calls that expire this Friday. The stat: 14,141 of the WMT Oct $68 calls traded versus only 960 open interest, signaling that this was fresh buying entering the market.
A check this morning shows that the open interest increased to 13,221, meaning 86.71% of the buying still remains to be closed out by this Friday. So this is a large and aggressive short term bet that Walmart stock will head higher over the coming days.
More importantly from a trading perspective, the implied volatility on the WMT October $68 calls rose sharply, moving from 20.84% on the close Monday to 30.01% at yesterday’s close. While Walmart stock fell 20 cents to finish at $66.73 yesterday, the October $68 calls actually rose 10 cents due to the big buying pressure.
Given that these calls have a 26 delta, the expectation would be for the calls to drop in price by 5 cents, instead of rising by 10 cents, providing a 15-cent edge to anyone selling options.
Click to Enlarge The unusual call volume in Walmart stock sets up two potential trades that lean bullishly along with the big call buyer while at the same time capturing the big spike in implied volatility.
The first is a straightforward buy-write — buying Walmart stock and selling a WMT call for each 100 shares purchased. Shares are at a critical juncture technically, as seen in the Walmart stock chart, with $66.50 being a key level to hold. Walmart stock closed just above that level at $66.73 yesterday.
A second possible way would be a calendar spread, buying the Oct $68 calls that expire next Friday on Oct. 23, while selling the Oct $68 calls that saw the big buying and expire this week. While the Oct. 23 expiration $68 calls saw an increase in implied volatility of 4.26 vol points, from 16.69% to 20.95%, it was far less than the 9.1-vol-point increase (20.84% to 30.01%) in the shorter-term $68 calls that expire this week.
With the calendar trading at 12 cents, it is a defined-risk way to capture the implied volatility while positioning slightly bullishly (2 deltas long), plus have the time decay benefit as Friday approaches. The calendar spread has breakeven points at $65.89 and $70.05 at this week’s expiration.
The calendar spread trade performs best if Walmart stock gets pinned at $68 on the close for this Friday’s expiration. For the buy-write trade, a close above $68 is optimal, as shares of Walmart stock would be assigned and the position exited. If WMT close below $68 Friday, we are left with either the stock or the long call position.
As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities.
