WMT Analysis

Wal-Mart Stores Inc. (WMT)

Update 3/21/2017: WMT gapped down sharply on the fifth trading day after earnings were published and afterward traced out a zig-zag, the sign of a sideward trend. I exited at 12.9% of maximum potential profit, a bit more than half of my normal 25% target.

The WMT position had about 50% more dollar-value risk than my guidelines suggest, an effect of the interaction between the strike prices and the options premium. I took the early exit because of uncertainty over how the sideways trend would resolve itself. Had the strike price fallen, I would have had plenty of cushion to keep the position profitable. But a rise of only $2 would have made the position unprofitable.

In exiting I eliminated the risk and attained my dollar-value goal. However, I fell short of my percentage goal.

Shares rose by 1.6% over 32 days, or a +788% annual rate. The options position produced a 14.9% yield on debit for a +169% annual rate.


 

WMT publishes earnings on Tuesday before the opening bell. U.S. markets are closed on Monday for the Presidents Day holiday.

I shall use the APR series of options, which trades for the last time 63 days hence, on April 21.

Implied volatility stands at 22%, which is 1.9 times the VIX, a measure of the volatility of the S&P 500 index.

WMT’s IV stands in the 52nd percentile of its annual range and the 97th percentile of its most recent broad movement.

The price used for analysis was $69.03.

Premium: $3.79 Expire OTM iron fly
WMT   Odds Delta
Calls
Long 75.00 91.0% 10
Break-even 71.29
Short 67.50 41.6% 62
Puts
Short 67.50 58.2% 39
Break-even 63.71
Long 60.00 92.1% 19

The premium is 51% of the width of the position’s wings.

The risk/reward ratio is 1:1.

Decision for My Account

I have entered a position on WMT as described above. The stock at the time of entry was priced at $69.06.

By Tim Bovee, Portland, Oregon, Feb. 17, 2017

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