Wednesday, February 17, 2016

WMT Analysis

Update 2/18/2016: WMT fell sharply after earnings were announced, placing the position at 83% of its potential, and I exited for a profit. Shares declined by 5.1% over a day, or a -1,861% annual rate. The options position produced a 483.3% yield on debit for a +176,417% annual rate.

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

[WMT in Wikipedia]


I shall use the MAR series of options, which trades for the last time 30 days hence, on March 18.


Implied volatility stands at 31%, which is 1.3 times the VIX, a measure of volatility of the S&P 500 index. WMT’s volatility stands in the 84th percentile of its most recent range. The price used for analysis was $66.17.

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 been in a downtrend since January 2015. It bounced into a counter-trend rally to the upside on Nov. 13, 2015 but remains well below the prior peak. It has been trending sideways for the past couple of weeks.

One of the past four earnings announcements was followed by a price increase.

Brokerages in aggregate give WMT a negative 67% enthusiasm index, with 17% of 18 analysts issuing strong-buy recommendations.

I'm shall use a bearish structure for the trade.
Bear call spread, short the $67.50 calls and long the $70 calls,
sold for a credit and expiring March 19.
Probability of expiring out-of-the-money

The premium is $0.81, which is 32% of the width of the position’s wings. The stock at the time of entry was priced at $66.31.

The risk/reward ratio is 2.1:1.

The profit zone reaches $1.19 above the entry price. The biggest immediate move after each of the past four earnings announcements was $3.49, and the average was $2.69. After eliminating the maximum and minimum post-earnings movements, the core tendency is $2.60.

Decision for My Account

I have entered a position on WMT as described above.

-- Tim Bovee, Portland, Oregon, Feb. 17, 2016


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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