Trade Idea: A Potential Earnings Trade in Walmart (WMT) - Cabot Wealth Network

Trade Idea: A Potential Earnings Trade in Walmart (WMT)

earnings-play-trades-may-16-22

Walmart (WMT) is due to announce before the opening bell Tuesday.

So, as always, let’s go through the exercise of looking at a potential trade and its associated mechanics to see if WMT is offering a decent trading opportunity this time around.

Here is an early look at a potential earnings trade for next week. Hopefully this helps a few of you, particularly those who are new to earnings trades, with the mechanics of a trade.

Iron Condor Earnings Trade in Walmart (WMT)

Again, Walmart (DIS) is due to announce before the open Tuesday. So, let’s use a risk-defined options strategy like an iron condor.

The stock is currently trading for 147.72.

earnings-trade-WMT-may-16

The next item is to look at the expected move in WMT for the expiration cycle that I’m interested in.

The expected move or expected range over the next 4 days can be seen in the pale, orange-colored bar below. The expected move is from 142 to roughly 153, for a range of $11.

expected-move-wmt-may-earnings

Knowing the expected range, I want to, in most cases, place the short call strike and short put strike of my iron condor outside of the expected range, in this case outside of 142 to 153.

This is my preference most of the time when using iron condors.

If we look at the call side of WMT for the May 20, 2022, expiration, we can see that the 157.5 call strike offers an 89.22% probability of success. So, I’m going to sell the short call at the 157.5 call strike and define my risk with the 162.5 call strike. By choosing the 162.5 call strike to define my risk, I know that there is less than a 8% chance that I will take a max loss on the trade.

bear-calls-WMT-walmart-may-earnings

Now let us move to the put side. Same process as the call side. But now we want to find a suitable strike below the low side of our expected move, or 142. The 135 put strike, with an 90.74% probability of success, works as our short put strike. I’m going to define my risk by choosing the 130 put strike with a 90.74% probability of success. This means we have less than a 9% chance of taking a max loss on the downside.

puts-wmt-walmart-earnings-trade

We can create a trade with a nice probability of success if WMT stays between our 22.5-point range, or between the 157.5 call strike and the 135 put strike. Our probability of success on the trade is 89.22% on the upside and 90.74% on the downside.

I like those odds.

Here is the trade:

Simultaneously:

Sell to open WMT May 20, 2022, 157.5 calls

Buy to open WMT May 20, 2022, 162.5 calls

Sell to open WMT May 20, 2022, 135 puts

Buy to open WMT May 20, 2022, 130 puts for roughly $0.48 or $48 per iron condor

price-wmt-walmart-earnings

Our potential return on the trade: 10.6%

Our margin requirement is $452 per iron condor.

Again, the goal of selling the WMT iron condor is to have the underlying stock stay below the 157.5 call strike and above the 135 put strike immediately after WMT earnings are announced.

Here are the parameters for this trade:

  • The Probability of Success – 89.22% (call side) and 90.74% (put side)
  • The maximum return on the trade is the credit of $0.48, or $48 per iron condor
  • Breakeven level: 157.98 – 134.52
  • The maximum loss on the trade is $448 per iron condor. Remember, we always adjust if necessary, and always stick to our stop-loss guidelines. Position size, as always, is key.

One other important note: I prefer to make these trades the day before earnings are announced, so I would expect to see the premium a bit lower than it is now due to decay. So premium could be an issue at the time of the trade. But I like to see where potential trades stand the week to a few days prior, so I have a good understanding of what stocks look appealing for a potential trade around earnings, which is why I go through this exercise with the stocks on my weekly earnings watch list.

Comments

  • I went out my own, prior to reading this. Used the logic presented and used different strikes on the call side.
    When Walmart opened it feel well outside the range, surprised me. Full 400+ loss.

    How do you handle these situations?

  • Alfred C.

    Is there a reason why you choose 5/20 over 5/27 expiration? I sold an Iron Condor on HD, using $260/$265P, and $330/$335C. But I use the 5/27 cycle to get $0.88 credit. Really appreciate all your posts, CVS and DIS were winners for me, thanks to you.

    • Andy C.

      Alfred,

      I went a little closer as WMT was due to announce early in the week. If it was later in the week I would have gone out one week. Glad you’ve had success.

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