Options Theory: The Walmart Stock Crash & Fading Fear
May 19, 2022
The bear has come to retail. Walmart & Target sounded the alarm this week that inflationary pressures were coming home to roost. Shares of both retail giants crashed following underwhelming earnings, suffering their largest single-session losses since 1987.
With fear running roughshod through the retail industry, it could be time to trot out the old “Fade the Fear” playbook. First introduced in the Bear Market Survival Guide, the strategy consists of the following:
- Find an oversold stock/ETF. Preferably one with quality fundamentals and/or that you’re willing to purchase.
- IV Rank needs to be high signaling options are expensive.
- Wait for a bullish trigger such as trading above a prior day’s high.
- Sell short-term far OTM naked put or bull put spread for at least a 10% ROI.
- To further increase your odds, scale in so that you can add size if the selloff lasts longer than expected. I usually use 3 tiers with the 2nd and 3rd entry capturing 50% to 100% more credit than the first tier.
Currently, Walmart checks all the boxes.
It’s grossly oversold, has sky-high implied volatility, and is a company with quality fundamentals that I don’t mind owning. The trickiest part of the trade is the timing. There’s no denying WMT is a falling knife. And there’s no evidence yet that a bottom is forming, let alone a pivot low.
But that’s precisely what this particular strategy is designed around. It’s a counter-trend trade that tries to game the snapback when sellers have pushed prices too far too fast. Thus, the lower WMT goes, the more attractive it becomes for this trade. Right now, we’re down three consecutive days following the disastrous earnings report. Will we fall a fourth or fifth day? Maybe. So far Thursday’s candle is showing slowing momentum, so there’s a chance a pivot low looms.
For now, I like using Thursday’s high as the trigger point. I would lower that each successive down day so that we trigger on the first up day.
Which Bull Put Spread?
Given the slightly higher share price, a bull put spread is the easier trade here. Currently, the June $110/$105 bull put spread is trading for around 60 cents. Thus, if I was scaling in, my entry for three tiers would be 60 cents, 90 cents, and $1.20.
If we’re lucky and WMT falls significantly further before triggering, we may be able to shift the strike prices down to $105/$100 but right now that spread only fetches 32 cents. I need at least 50 cents to make it work.
The bet is not that WMT will rise aggressively from here, though that would certainly help. Instead, when Fading the Fear we’re more so wagering that puts have become so expensive that it’s unlikely the stock will fall far enough to justify the prices people are paying. Thus, we can still win if WMT falls further. It simply can’t fall too far.
Read more Options Theory [FREE Content]
Every Thursday our resident options addict, Tyler Craig, will be at the helm to help you demystify derivatives and better understand what truly makes them tick. Options for beginners? Come this way, please. Enlightenment awaits.
Financial freedom is a journey
Sign up now and gain unfettered access to all of the quality content and powerful Scouting Reports that our Pro Members enjoy for 15-days absolutely free with no strings attached and let us show you what your trading has been missing.
Legal Disclaimer
Tackle Trading LLC (“Tackle Trading”) is providing this website and any related materials, including newsletters, blog posts, videos, social media postings and any other communications (collectively, the “Materials”) on an “as-is” basis. This means that although Tackle Trading strives to make the information accurate, thorough and current, neither Tackle Trading nor the author(s) of the Materials or the moderators guarantee or warrant the Materials or accept liability for any damage, loss or expense arising from the use of the Materials, whether based in tort, contract, or otherwise. Tackle Trading is providing the Materials for educational purposes only. We are not providing legal, accounting, or financial advisory services, and this is not a solicitation or recommendation to buy or sell any stocks, options, or other financial instruments or investments. Examples that address specific assets, stocks, options or other financial instrument transactions are for illustrative purposes only and are not intended to represent specific trades or transactions that we have conducted. In fact, for the purpose of illustration, we may use examples that are different from or contrary to transactions we have conducted or positions we hold. Furthermore, this website and any information or training herein are not intended as a solicitation for any future relationship, business or otherwise, between the users and the moderators. No express or implied warranties are being made with respect to these services and products. By using the Materials, each user agrees to indemnify and hold Tackle Trading harmless from all losses, expenses and costs, including reasonable attorneys’ fees, arising out of or resulting from user’s use of the Materials. In no event shall Tackle Trading or the author(s) or moderators be liable for any direct, special, consequential or incidental damages arising out of or related to the Materials. If this limitation on damages is not enforceable in some states, the total amount of Tackle Trading’s liability to the user or others shall not exceed the amount paid by the user for such Materials.
All investing and trading in the securities market involves a high degree of risk. Any decisions to place trades in the financial markets, including trading in stocks, options or other financial instruments, is a personal decision that should only be made after conducting thorough independent research, including a personal risk and financial assessment, and prior consultation with the user’s investment, legal, tax and accounting advisers, to determine whether such trading or investment is appropriate for that user.
