By Michael Zerinkas
Wal-Mart Stores (WMT) is scheduled to report earnings before the bell tomorrow morning. The retailing giant’s stock has been under pressure as of late, therefore it will be interesting to see what company management has to say about the future of the economy.
Wal-Mart’s stock seems like it can react higher whether they report a great quarter or a lackluster one; the key will be guidance. If WMT echoes recent comments by CEOs about a weaker second half for consumers, that will actually bode well for the stock given that the consumer trade-down trend will continue or improve.
So to recap, the EPS can go either way, though a number that is in-line is more or less a given, but getting long shares near this level ($50.00, 0.009% lower) looks attractive technically.
What’s the trade?
Given that this is options expiration week, the front month volatility is running high, ~28%, which is well above the stock’s historical vol of 17% and its overall implied vol of 21%. Traders looking for a long option should look out to September, where vols are not so overpriced (or priced to fall) at 20%. Better yet, use that near term overpricing to fund your September trade.
Traders should look to sell the August $50 straddle for $1.37, using those proceeds to purchase the September $50 call for $1.42. Net debit on the transaction is $0.05. This puts you in the long Sept call, adjusted for the current stock price, of $0.48, a 66% discount.
Disclosure: No positions