Monday, November 16, 2015

WMT Analysis

Update 11/30/2015: WMT reached 51% of its maximum potential profit, and I exited to avoid further time risk.

Shares rose by 2.9% over 14 days, or a +75% annual rate. The options position produced a +103.5% yield on debit for a +2,697% annual rate.

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

[WMT in Wikipedia]


I shall use the DEC series of options, which trades for the last time 32 days hence, on Dec. 18.


Implied volatility stands at 31%, which is 1.6 times the VIX, a measure of volatility of the S&P 500 index. WMT’s volatility stands at the peak of its annual range.

Ranges implied by options and earnings
WeekSD1 68.2%SD2 95%Earns
Implied volatility 1 and 2 standard deviations; maximum earns move

The Trade

WMT's price has been falling since January.

I use freely available information from Zacks Investment Research in structuring my trades. The stock's Zacks Rank is very bearish at 5, with no earnings surprise expected. Earnings announcements over the past year have tended to produce price declines on the next trading day. My analyst enthusiasm index is -80%, a very low level indeed.

The long decline and bearish profile of WMT have long ago been priced into trader expectations. I shall take a direction-neutral approach with offset to the downside if the options grid allows it.

Iron condor, short the $60 calls and long the $62.50 calls,
short the $52.50 puts and long the $40 puts,
sold for a credit and expiring Dec. 19.
Probability of expiring out-of-the-money


The premium is $0.59, which is 24% of the width of the position’s wings. The stock at the time of entry was priced at 57.13.

The risk/reward ratio is 3.2:1.

The zone of profit in the proposed trade covers a $3.75 move either way. The biggest immediate move after each of the past four earnings announcements was $3.74, and the average was $3.11.

Decision for My Account

I have opened a position on WMT as described above.

-- Tim Bovee, Portland, Oregon, Nov. 16, 2015


Tradecraft: Playing the odds to build winning stock market trades from options, a description of how I trade, can be read here.


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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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