Thursday, December 24, 2015

WMT Analysis

The retail chain Wal-Mart Stores Inc. (WMT), headquartered in Bentonville, Arkansas, closed above its 20-day price channel on Wednesday. With low historical odds of success and low implied volatility relative to its one-year range, WMT is a candidate for a time spread.

[WMT in Wikipedia]


I shall use the FEB series of options, which trades for the last time 58 days hence, on Feb. 20.


Implied volatility stands at 18%, which is 1.2 times the VIX, a measure of volatility of the S&P 500 index. WMT’s volatility stands in the 27th percentile 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 has completed four bull signals in the past year, one of them a winner, yielding 7.0% over 81 days. The three unsuccessful signals lost 5.4% over 12 days. The success rate is 25%.
The stock has been in a downtrend since January and is presently in a counter-trend correction to the upside from its low of Nov. 13.

Diagonal spread, long the $60 calls expiring Jan. 20, 2017
and short the $62.50 calls expiring Feb. 20, 2016
bought with a credit.
Probability of expiring out-of-the-money


The premium on the long leg is a $4.48 debit and on the short leg, a $0.91 credit, for a net entry debit of $3.03.

Decision for My Account

I'm declining to take the trade.

At my benchmark $500 sizing of a hypothetical trade (in this case assessed in comparison to the long-leg debit), the position would be one contract and the short-leg credit would be $91. My rule is to exit when profit has reached half of its potential and, at a $500 sizing, I aim for a take home at least $100 per trade, the potential win is too small to interest me.

A smaller debit on the long leg would be possible if I could use an earlier expiration, such as August, six months out from the short leg. But the structure of the options grid won't allow that at this point.

-- Tim Bovee, Portland, Oregon, Dec. 24, 2015


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

Elliott wave analysis tracks patterns in price movements. StockCharts has a good explainer. The principal practioner of Elliott wave analysis is Robert Prechter at Elliott Wave International. His book, Elliott Wave Principle, is a must-read for people interested in this form of analysis, as is his most recent publication, Visual Guide to Elliott Wave Trading


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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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