Tuesday, October 9, 2012

WMT Options – Wal-Mart Headed for a Fall

 

The game appears to have changed at Wal-Mart (WMT). The company just announced better-than-expected earnings of $1.17 per share versus a Thomson Reuters estimate of $1.12 per share.

But if you look more closely at the data, you can see that Wal-Mart is facing considerable headwind. Negative same-store sales at its flagship stores, weak guidance under the midpoints, practically flat same-store sales expectations, and more, lead me to believe there is currently too much working against the stock.

Investors holding Wal-Mart need to consider options for protection in the near term to protect gains. And don’t be shocked if options traders start making bets against the world’s biggest retailer either.

Wal-Mart looks to be a short-term risk more than a long-term risk. The company was supposed to be the winner of the recession, but it looks like the customer defection and low-price-only mentality may have worn off just as fast as it came on. And now its chart is teetering.

Before the earnings announcement, there was a shot for a technical breakout above the 50-day moving average. Now that we have the earnings event behind us, it seems that only a monster stock market rally would make that the case. 

Wal-Mart traded very briefly above $55 in early January, but has since been faced with a series of lower highs. It has yet to face a real breakdown on its charts, which is why the use of options here actually looks better than an outright sale or short sale setup.

For investors long Wal-Mart, buying the WMT March 52.50 Puts (WMT   100320P00052500) costs about 71 cents, giving an implied stop out at $51.79. Going out to the June 2010 puts is just too expensive at more $2 per contract.

The good news here is that if you are extremely bullish despite the news and despite the chart, writing the WMT June 52.20 Call (WMT   100619C00052500) generates more than $2.

For speculators, the trade here is fairly easy. If downward momentum picks up next week, the contract to be in is the WMT March 50 Put (WMT   100320P00050000) at 20 cents looks like a cheap way to play it. 

It isn’t that Wal-Mart is doomed to break through $50 and head far lower. This just offers the most leverage and within a reasonable time frame. Expiration is exactly one month from today’s options expiration date giving an implied 1-cent per day of premium erosion.

The 50-day moving average is $53.63, and the 200-day moving average is $50.93. The last time that Wal-Mart came anywhere close to the 200-day moving average was in early November. 

Wal-Mart’s chart suggests that there is nothing but dead air under $52.75 or so (only 1% under today’s price) down to about $51, and by then the 200-day moving average will start coming into play.

Perhaps one issue that has held Wal-Mart up is that Warren Buffett added to the Wal-Mart stake in his latest quarterly portfolio changes. Wal-Mart got a small stake boost to over 39 million shares versus 37.8 million a quarter earlier, but this was well above the 19.9-plus million shares two quarters ago. Had this stake been a larger gain, that would be one thing. 

Wal-Mart is one of the largest companies in America by market cap and it trades about 13 million shares on average. Buffett isn’t a bad issue for Wal-Mart, but it is likely more noise than news at this point.

The risk here is building to the downside on anything short of a major rally. And it is very easy to protect your gains or even to bet against the stock with options in the near term. 

At $53.35 today, the near-term move seems more likely to be a move down toward $50 rather than back to $55 or higher. After all, there is a whole decade of dead money here to support that.

Tell us what you think here.

Related Articles:

  • How to Pick the Right Put Option
  • Make Money and Protect Your Portfolio at the Same Time
  • How to Stay One Step Ahead of a Major Reversal

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