WMT Momentum

Update 7/14/2015: WMT attained two-thirds of its maximum potential profit, and I exited to avoid further time risk. The more plain-spoken way of putting is that the price of buying back the options fell to 10 cents, and it's not worth hanging on any further for that small amount of additional profit. It doesn't make a dime's worth of difference, with the additional risk is factored in.

Shares rose by 0.1% over six days, or a 6% annual rate. The options position produced a 210.0% yield on debit, for a 12,775% annual rate.

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The discount retail chain Wal-Mart Stores Inc. (WMT), headquartered in Bentonville, Arkansas, broke above its 20-day price channel on Tuesday but pulled back to within the channel today. WMT publishes earnings on Aug. 18 before the opening bell, so any trade must be exited prior to the announcement.

[WMT in Wikipedia]

WMT

Odds

Only one of the three completed bull signals of the past  year produced a profit, making WMT a potential non-directional trade because of its historically low odds of success. The winner produced a 7.0% yield over 81 days. The two losing positions on average fell by 1.5% over 28 days.

Ranges

Click on chart to enlarge.

WMT at 1:47 p.m. New York time, 30 days hourly bars

Implied volatility stands at 21.4%, which is 1.2 times the VIX, a measure of volatility of the S&P 500 index. WMT’s volatility stands in the top percentile of its most recent rise and is also high in absolute terms, standing at the 93.9% of its high point over the past year.

Ranges implied by options and the chart

Week	SD1 68.2%	SD2 95%	Chart	Earns
Upper	75.92	78.39	73.86	N/A
Lower	70.98	68.51	70.36	N/A
Gain/loss	3.4%	6.7%

Implied volatility 1 and 2 standard deviations; chart support and resistance, maximum earns move
The Trade

I shall use the JUL monthly series of options, which trades for the last time nine days hence, on July 17.

Iron condor, short the $75 calls and long the $76 calls,
short the $72 puts and long the $71 puts,
sold for a credit and expiring Aug. 22.
Probability of expiring out-of-the-money

JUL	Strike	OTM
Upper	75	75.6%
Lower	72	73.9%

The premium is $0.31, which is about one-third the width of the position’s wings. The stock at the time of purchase was priced at $73.51.

The risk/reward ratio is 2:1.

In order to get it down to that point, which is a bit high for an iron condor, I leave portions of the one standard deviation range, both at the top and the bottom, outside of the profit zone. The chart range is covered at the top, but not entirely at the bottom.

It's a risk, and I'm willing to take it because of the uptrending nature of WMT's chart, and the absence of an earnings announcement during the short duration of this trade.

Decision for My Account

I've opened a position in WMT as described above.

-- Tim Bovee, Portland, Oregon, July 8, 2015

References

My volatility trading rules can be read here.


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Disclaimer

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.

No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decisions for his or her own account, and take responsibility for the consequences.

License



All content on Tim Bovee, Private Trader by Timothy K. Bovee is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.

Based on a work at www.timbovee.com.