Wednesday, May 18, 2016

WMT Analysis

Updated 6/1/2016: Good old WMT, the big-box store every analyst loves to hate, the stock whose reputation is so bad that it's hard to overstate the negative vibes it emanates.

And yet, when WMT published earnings on the morning of May 19, it beat the Street estimate by 11.7%, setting me up for a nice big loss on my bear call spread. Who would have thought? 

The stock price gapped up by $6.05 and never did the pullback that often happens after a dramatic move. It kept sprinting upward, peaking $8.23 above the pre-earnings closing price and $6.38 above the profit zone.

Since then it has drifted slightly lower and may eventually pull back. The problem is, I'm so far off from my profit zone that time decay is now working against me. Time to go.

And so I did, exiting the position with these results: Shares rose by 11.3% over 14 days, or a +294% annual rate. The options position produced a 68.9% loss on debit for a -1,797% annual rate.

At entry the position had a 66.5% chance of expiring out of the money for maximum profit; at exit it had a 7.0% chance.

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 JUN series of options, which trades for the last time 30  days hence, on June19.


Implied volatility stands at 29%, which is 1.9 times the VIX, a measure of volatility of the S&P 500 index. WMT’s volatility stands in the 71st percentile of its most recent range. The price used for analysis was $63.08.

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

Shoe Dog: A Memoir by the Creator of Nike
by Phil Knight

The Trade

WMT's price has been trending sideways for most of the 21st century, largely staying within a range about $10 wide. It broke higher from October 2014, peaking in January 2015 and then return to its the channel with which it has moved for so long.

Brokers have a negative view of WMT's prospects, collectively coming down with a -67% enthusiasm rating, with only 17% of 18 analysts issuing strong buy recommendations.

The price gapped down at the open after news of negative expectations.

WMT has closed higher the first trading session after earnings were announced only once in the past year.

The negatives outweigh the positives for WMT, and I shall essay a bearish trade.

Bear call spread, short the $65 calls and long the $67.50 calls,
sold for a credit and expiring 
June 19
Probability of expiring out-of-the-money


The premium is $0.74, which is 30% of the width of the position’s wings. The stock at the time of entry was priced at $63.46.

The risk/reward ratio is 2.4:1.

The zone of profit in the proposed trade covers a $1.07 move above the strike price. The biggest immediate move after each of the past four earnings announcements was $3.49, and the average was 2.49. After eliminating the maximum and minimum post-earnings movements, the central tendency is $2.24.

Decision for My Account

I have opened a position on WMT as described above.

-- Tim Bovee, Portland, Oregon, May 18, 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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