Wal-Mart Stores Inc. (NYSE: WMT) shares are soaring after the company announced a 1.4% September same-store sales increase and upped its Q3 forecast from 62 to 65 cents per share to new estimates of 66 to 69 cents per share, above analysts' predictions of 63 cents. If you think that the company won't fall by too much in the coming months, then now could be a good time to look at a bullish hedged trade on WMT.After hitting a one-year high of $52.15 in October 2006, the stock fell to a 52-week low of $42.09 in September. WMT opened this morning at $47.35. So far today the stock has hit a low of $46.93 and a high of $47.70. As of 10:55, WMT is trading at $47.18, up $1.59 (3.5%). The chart for WMT looks neutral but improving, while S&P gives the stock a neutral 3 STARS (out of 5) hold rating.
For a bullish hedged play on this stock, I would consider a January bull-put credit spread below the $40 range. A bull-put credit spread is an options position that combines the purchase and sale of put options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. This particular trade will make a 5.3% return in just 3 months as long as WMT is above $40 at January expiration. Wal-Mart would have to fall by more than 30% before we would start to lose money.
WMT hasn't been below $40 at all in the past year and has shown support around $43 recently. This trade could be risky if the company's earnings (due out on 11/13) disappoint, but even if that happens, this position could be protected by strong support above $42, where WMT bottomed out in September.
Brent Archer is an options analyst and writer at Investors Observer.
DISCLOSURE: At publication time, Brent neither owns nor controls positions in WMT.
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Reader Comments (Page 1 of 1)
1. walmart's report is just more BS. Again, after lowering their estimates they now try to crow that they beat their estimates. In reality their increase did not even keep pace with the inflation in grocery prices.
Posted at 4:34PM on Oct 11th 2007 by NickP