Wal-Mart Stores Inc (NYSE:WMT) is one of few retailers who is still doing well in the age of Amazon.com, Inc. (NASDAQ:AMZN). Most other bricks-and-mortar stores are dying on the vine scrambling for market share.
Technically, WMT stock comes into earnings this week equidistant from its two-year highs and lows. I am a believer that markets overshoot on the way up and down. In Walmart’s case, this was clear to see on the chart — the price is in perfect balance relative to the extremes.
Click to Enlarge Since the fundamental story for WMT stock is still as solid as ever, I am willing to take a risk on the long side even going into the uncertainty of earnings.
I am a conservative trader, so I won’t risk $76 per share to buy WMT stock outright and with no room for error. Instead, I will use options to generate income from selling risk against support.
The idea is not new, as I’ve demonstrated how easy it was back in March when I shared a trade that
delivered profits with zero out-of-pocket expense.
To me, Walmart’s strength is in its simple goal to be the low-price leader. I don’t hear as much about new efforts to improve its image, so management is focused on better execution of the plan at hand.
The Trade: Sell WMT Dec $60 put and collect 50 cents per contract. With a 20% price buffer this trade has a 90% theoretical chance of maximum gains. If price falls below $59.50, I would accrue losses from having to own the stock.
It is important to note that I am not chasing a price target since I just need WMT stock stay above my sold put to win. I am collecting a premium for the opportunity to own WMT stock at a 20% discount from the current price. In essence, I am selling someone a bearish WMT lotto ticket that will be a loser for them by design.
Selling naked puts is not suited for all traders so to reduce the size of the risk I can change this setup to be a credit put spread instead, and it wouldn’t require a lot of compromise.
The Alternate: Sell the WMT Dec $65/$60 credit put spread which has a slightly smaller price buffer but still could yield 8% on risk. Compare that with buying Walmart stock at $76 and needing it to rally 8% more to match the performance of the spread.
Learn how to generate income from options . Nicolas Chahine is the managing director of . As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at and stocktwits at .
