Walmart broke out above the 50-day moving average after showing signs of accumulation since January.
According to the IBD Stock Checkup, Walmart stock is ranked No. 1 in its group and has a Composite Rating of 81, an EPS Rating of 81 and a Relative Strength Rating of 77.
When it comes to options, we normally look at short-term trades — anywhere from one week to one month.
Longer-term option trades tend to move a little slower than shorter-term trades. That allows more time to adjust or close, but also means a lower annualized return.
Today, we will look at a longer-term bull put spread.
As a reminder, a bull put spread is a defined risk strategy, so you always know the worst-case scenario in advance.
Trade Aims At Rising Share Price
This type of trade will profit if Walmart stock trades sideways or higher and even sometimes if it trades slightly lower.
With Walmart trading around 144, if we use the Sept. 15 expiration, we can sell a 130-strike put and buy a 125-strike put to set up the bull put spread. That spread was trading around $0.80 late Monday. Keep in mind that liquidity is lower in longer-term options, which means it can be harder to get a good fill price.
Selling this spread would generate roughly $80 in premium with a maximum risk of $420.
If the spread expires worthless that would be a 19% return in six months, provided Walmart is above 130 at expiration.
The maximum loss would occur if Walmart stock closes below 125 on Sept. 15. That would see the premium seller lose $420 on the trade.
The break-even point for the trade is 129.20, which is calculated as 130 less the $0.80 option premium per contract.
I would set an adjustment point or a stop loss if Walmart stock drops below 135. Otherwise, another good rule of thumb is to limit the loss to the amount of premium received. In this case it would be $80.
Sticking to this stop loss level will help avoid large losses if the trade goes south.
Oil ETF, JPMorgan Trades Work Out
The bear call spread discussed March 13 on the VanEck Oil Services ETF can be closed for a nice profit. Same for the March 16 diagonal put spread on JPMorgan stock.
Please remember that options are risky, and investors can lose 100% of their investment.
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This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ
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