Wednesday, August 17, 2016

WMT Analysis

Update 8/19/2016: WMT's implied volatility dropped sharply after earnings were published, as did the premium, allowing for a quick exit at 52% of maximum potential profit.

Shares rose by 0.7% over two days, or a +118% annual rate. The options produced a 108.1% yield on debit for a +19,730% 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 SEP series of options, which trades for the last time 30 days hence, on Sept. 16.


Implied volatility stands at 24%, which is 1.9 times the VIX, a measure of volatility of the S&P 500 index. WMT’s volatility stands in the 49th percentile of its annual range. The price used for analysis was $72.54.

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

Invisible Influence: The Hidden Forces that Shape Behavior
by Jonah Berger

The Trade

WMT's price declined from January to November 2015 and then began rising. It hit a peak less than a week ago on Aug. 11 and, having retraced half of the decline, has paused, dipping below the 50-day moving average.

Brokers in aggregate give WMT a negative 53% enthusiasm rating, or loathing rating, as seems appropriate when enthusiasm sinks to such a low level, with only 24% of 17 analysts issuing strong buy ratings.

Recent changes by analysts, according to Zacks Investment Research, suggest a heightened chance of an upside earnings surprise.

Half of the earnings announcements over over the past year resulted in price rises the first trading day after earnings.

Overall the assessment tends toward the bearish, but with the some bullish elements that can't be ruled out. I'll attempt a non-directional trade.

The options grid has less granularity than I would like, with a $2.50 spread between strikes.

Iron condor, short the $75 calls and long the $77.5 calls,
short the $67.50 puts and long the $65 puts,
sold for a credit and expiring Sept. 17.
Probability of expiring out-of-the-money

The premium is $0.77, which is 31% of the width of the position’s wings.
The risk/reward ratio is 2.2:1.

The zone of profit in the proposed trade covers a $3.25 move either way. The biggest immediate move after each of the past four earnings announcements was $6.05, and the average was $3.13. After eliminating the maximum and minimum post-earnings movements, the central tendency is $2.24.

In order to get a sufficient risk/reward ratio I narrowed the upper boundary of the profit zone.

Decision for My Account

I have entered a position on WMT as described above. The stock was priced at $72.56 at entry.

-- Tim Bovee, Portland, Oregon, Aug. 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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