WMT Analysis

Update 9/19/2015: The calls portion of the WMT iron condor expired without value for maximum profit, although the puts, exited earlier, produced a loss. Shares decliend by 11.5% over 28 days, or a -150% annual rate. The iron condor produced a -69.7% loss on debit, for a -909% annual rate.

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Update 9/3/2015: WMT moved below its profit zone immediately after earnings were announced. It has recovered a bit in the past week but seems unlikely to become profitable prior to expiration in mid-September. 

I've exited the unprofitable puts -- the tested side of the iron condor -- converting the position into a bear call spread. I'll calculated results after the position expires entirely 15 days from now.

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Update 8/14/2015: I've opened a position in WMT as described below. The stock price at entry was $72.23.

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The retail chain Wal-Mart Stores Inc. (WMT), headquartered in Bentonville, Arkansas, publishes earnings on Tuesday before the opening bell.

[WMT in Wikipedia]

WMT

I shall use the SEP series of options, which trades for the last time 35 days hence, on Sept. 18.

Ranges

Click on chart to enlarge.

WMT after Aug. 13 close, 90 days 2-hour bars

Implied volatility stands at 24.0%, which is 1.8 times the VIX, a measure of volatility of the S&P 500 index. WMT’s volatility stands in the 100th percentile of its most recent rise and at the high for the past year.

Ranges implied by options and the chart

Week	SD1 68.2%	SD2 95%	Chart	Earns
Upper	77.46	82.82	74.10	75.85
Lower	66.76	61.40	70.36	68.37
Gain/loss	7.4%	14.9%

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

In constructing the proposed trade, I stretched out to cover the one standard deviation range, which is wider than the maximum earnings movement range.

Iron condor, short the $77.50 calls and long the $80 calls,
short the $67.50 puts and long the $65 puts,
sold for a credit and expiring Sept 19.
Probability of expiring out-of-the-money

SEP	Strike	OTM
Upper	77.5	86.4%
Lower	67.5	81.5%

The premium is $0.44, which is 18% of the width of the position’s wings.The stock at the time of analysis was priced at $72.11.

The risk/reward ratio is 4.7:1.

The zone of profit in the proposed trade covers a $6.25 move either way. The biggest immediate move after each of the past four earnings announcements was $3.74, and the average was $2.59.

Decision for My Account

On Friday I shall attempt to open a position in WMT as described above.

-- Tim Bovee, Fukuoka, Japan, Aug. 14, 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.

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