EOT Trade Alert – April 29, 2011
April 29, 2011
Trade Alert:
Buy WMT June 2011 $55 Puts at $1.45 or better
Company Background:
Wal-Mart Stores (WMT) doesn’t need much of an introduction. The discount retailing giant operates a variety of large discount department stores and warehouse stores in the US and abroad.
Short-Term Catalyst:
Nothing is going right for Wal-Mart.
Sales are falling off a cliff. In fact, the discount retailer is suffering through seven quarters of declining same-store sales. The king of discount retailing is now losing the game they once dominated… Low Prices.
What’s going on?
WMT continues to lose business to dollar stores like Dollar General (DG), Dollar Tree(DLTR), and Family Dollar (FDO). And now according to two retail consultants, even Target (TGT) has lower prices on grocery and household goods than WMT.
WMT strayed from their core competitive advantage. They’ve let other retailers beat them by offering lower prices. As a result, the company’s growth rate is in the toilet.
And now things are getting worse.
With gas prices pushing $4 per gallon, Wal-Mart’s core customers are running out of money. The high cost of fuel is cutting deep into family budgets.
According to Wal-Mart CEO Mike Duke, “Purchases are really dropping off by the end of the month even more than last year… This end-of-month cycle is growing to be a concern.”
Simply put, Wal-Mart’s customers don’t have enough money to drive sales growth.
Despite all of the negatives, WMT’s stock price has shot up over the last few weeks. But it’s not because of anything they’re doing right.
The reason for the surge in share price is simple. WMT is a major component of consumer staples ETFs. And right now investors are rotating money out of cyclical sectors into more defensive ones.
It’s given shares of WMT a nice 8% pop over the last few weeks. But the rally’s not going to last.
In a few weeks, WMT delivers their earnings report. Weaker than expected earnings or a downbeat forecast will likely spark a quick correction.
Let’s grab put options on WMT now to profit from them disappointing investors next month.
Trade Details:
| Underlying Stock Symbol: | WMT |
| Current Bid-Ask Price: | $1.34 – $1.36 |
| Option “Buy Up To” Price: | $1.45 |
| Break-Even On Stock At Expiration: | $53.55 |
| Maximum Risk Per Contract: | $145 |
Exit Strategy:
WMT is trading at $54.82 per share. Resistance levels will be at $57 and again at $58. Remember, we want this stock to move lower. Support levels will be at $52 and $50. Conservative investors should look to exit at the first support or resistance level. Aggressive investors may want to hold for a bigger move.
Chart:
Category: EOT Trade Alert
