Nervous about the price of Walmart shares lower? A Bear Put Spread Can Protect Profits

Investors in retail giant Walmart (NYSE:) haven't had much to write home about in the past 12 months. WMT shares have fallen about 3.5% in the past year. In comparison, the returned 12.6%.

On Aug. 18, WMT shares crossed $152 to hit a record high. The stock's 52-week range was $126.28 – $152.57 while its market cap is $400.5 billion.

Seasoned investors are watching the battle between Amazon (Nasdaq 🙂 and Walmart – a collision of titans, leaders in the retail and e-commerce sectors. Both names have also started offering financial services to customers.

One area in which Walmart differentiates itself from Amazon is "click-and-collect," where customers pick up their orders in-store or on the curb. Show recent statistics:

"Walmart scored 25.4% of all click-and-collect orders in 2021 – the largest share of all U.S. retailers."

Walmart released robust numbers on Nov. 16. For financial reporting purposes, the fiscal year ends on January 31. Quarterly revenue increased 4.3% year-over-year to $140.5 billion. Adjusted EPS was $1.45 versus $1.34 reached a year ago.

Regarding the results, CEO DOUG MCMILLON said:

“Our momentum continues with strong sales and earnings growth worldwide. Our omnichannel focus is pushing digital penetration to record levels. We have gained market share in supermarkets in the US, and more customers and members are coming back to our stores and clubs around the world.”

Management also raised its outlook for the fourth quarter. It now expects a 5% increase in US comparable store sales. FY 2022 adjusted EPS guidance also increased to $6.40, up from the band of $6.20-6.35.

Prior to the release of the quarterly results, WMT stock was about $145. Since then, it has been choppy, trading in a range of about $135 and $148. As of this writing, the stock is around $144.30, and the current price supports a dividend yield of 1.53%.

Next Move In WMT Stock?

Under the 38 analysts that have an "outperform" in Walmart shares via Investing.com, with an average price target of $ 166.84. Such a move would represent an increase of approximately 15.5% from current levels. The target range is between $70.06 and $201.

Analyst consensus estimates polled by Investing.com.

Chart: Investing.com

Similarly, according to a number of valuation models such as that might consider P / E or P / S multiples, dividends or residual value, the average fair value WMT available via InvestingPro is $ 161.35.

Source: InvestingPro

However, many investors will probably be nervous about how WMT shares will make it in the coming weeks, given both recent volatility in broader markets and the problems in the supply chain with which retailers are still confronted. In addition, we are about to start a busy earnings season that could see declines in store names.

Short term, we expect Walmart stocks to potentially fall below $140, possibly towards $135.

After such a potential decline, WMT stocks are likely to trade sideways for several weeks until they establish a base, possibly around $145, and then begin another leg.

Therefore, Walmart bulls with a two- to three-year horizon that are not concerned about short-term volatility might consider buying the stocks around these levels for long-term portfolios. Others, who have experience with options strategies and believe that WMT stocks could fall further, may prefer to try a bear put spread.

However, most option strategies are not suitable for all retail investors. Therefore, the following discussion is provided for educational purposes only and not as an actual strategy to be followed by the average small investor.

Bear Put Spread on WMT Stock

Price at the time of writing: $ 144.30

In a bear put spread, a trader has a long put with a higher strike price and a short put with a lower strike price. Both branches of the trade have the same underlying stock (i.e. Walmart) and the same expiration date.

The trader wants Walmart stock to fall in price. However, in a bear put spread, both potential gains and potential loss levels are limited. Such bear spread is established for a net cost (or net debit), which represents the maximum loss.

Let's look at this example:

For the first stage of this strategy, the trader can buy an AT-THE-MONEY (ATM) or light out-of-the-money (OTM) put option, just like the WMT March 18, 140 strike Put option . This option is currently offered for $3.25. It would cost the trader $325 to own this put option which expires in just over two months.

For the second part of this strategy, the trader sells a WMT put, such as the WMT Mar 18 135 strike put option. The current premium of this option is $1.90. The option seller would receive $190, excluding trading commissions.

Maximum Risk

In our example, the maximum risk will be equal to the cost of the distribution plus commissions. Here the net cost of the spread is $1.35 ($3.25 – $1.90 = $1.35).

Since each option contract represents 100 shares of the underlying stock, i.e. WMT, we need to multiply $1.35 by 100, which gives us $135 as the maximum risk.

The trader could easily lose this amount if the position is held the expiration and both legs declined worthless, that is, if the Walmart course of the share at the expiration above the exercise price of the long well (or $ 140 in us example).

Maximum income potential

In a bear spout spread, potential profit is limited to the difference between the two exercise prices reduced with the net costs of the distribution plus committees.

So in our example, the difference between the strike prices is $5 ($140 – $135 = $5). And as we have seen above, the net cost of the spread is $1.35.

The max profit is therefore $3.65 ($5.00 – $1.35 = $3.65) per share, minus commissions. When we multiply $3.65 by 100 shares, the maximum profit for this option strategy comes to $365.

The trader will realize this maximum profit if the WMT equity price is on or below the exercise price of the Short Put (lower exercise price) on expiration, or $ 135 in our example).

Short put positions are typically assigned at expiration if the stock price is below the strike price (i.e. $135 in this example). However, there is also the option of early placement. Therefore, the position should be monitored from one to maturity.

Break-Even WMT Price at Expiration

Finally, we also need to calculate the break-even point for this trade. At that price, commerce will neither gain nor lose money.

At the expiry, the exercise price of the long well (that is, $ 140 in our example) minus the net premium paid (ie, $ 1.35 here) would be our Break-even WMT price.

In our example: $140 ? $1.35 = $138.65 (minus commissions).

Bottom Line on Walmart Stocks

We consider WMT stock to be a fixed long-term choice for most portfolios. Despite the short-term volatility in equities, the growth trajectory remains intact for this retail and e-commerce giant.

Yet WMT stocks could come under further pressure during this earnings season. Therefore, a trading strategy as described above would be suitable for traders with a bearish look at Walmart shares.

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