SerpApi.Org
Big-box retailer Walmart (WMT) has been one of the more disappointing tickers in the market and for arguably obvious reasons. With a spiraling Iran conflict that could potentially worsen, WMT stock faces serious technical pressure. As headwinds in both the energy and consumer markets apply stress to the retail industry, WMT has been on the wrong side of equity transactions.
In the trailing month, Walmart stock has declined by nearly 6%, bringing its year-to-date performance to 1% below parity. Subsequently, the Barchart Technical Opinion indicator rates the ticker as a 72% Strong Sell, with traders seemingly concerned about signs of consumer fatigue that are not adequately balanced out by the trade-down effect.
Another crucial factor to consider is the retailing giant’s upcoming earnings disclosure, scheduled for Aug. 20. Sentiment ahead of that disclosure appears to be leaning bearishly or at least toward a more protective stance. This doesn’t necessarily mean that WMT stock is doomed but the smart money isn’t demonstrating much optimism.
Looking at the volatility skew for the Aug. 14 expiration date, the chart shows a classic smirk: more demand exists for out-the-money (OTM) puts than for OTCM calls. As such, the skew is weighted more heavily on the left (put) side, with the priority focusing on downside protection rather than upside convexity.
But should bullish traders worry? My argument is no. Fundamentally, the argument for WMT stock really hasn’t changed. Yes, the escalating Iran conflict imposes obvious concerns. However, Walmart’s moat has always been to provide necessary and discretionary goods at everyday low prices. Further, the digitalization of its business is only going to add more conveniences to the flywheel.
From a quantitative perspective, Walmart stock has suffered a long downturn — and such circumstances are extremely rare for WMT. In my opinion, traders are likely to view this dynamic as a discounted opportunity, opening the door for a speculative play.
Anticipating an Imminent Market Transition for WMT Stock
Generally speaking, it’s reasonable to assert that advanced algorithmics and rules-based protocols dominate modern equity markets. That’s because of the nature of professional trading: you can either play the response game or the prediction game. Since the latter category is a chaotic free-for-all, the big money prefers to operate in the former.
There’s a quote from the movie Wall Street that best illustrates this concept: “The public's out there throwing darts at a board, sport. I don't throw darts at a board. I bet on sure things. Read Sun-Tzu, 'The Art of War.' Every battle is won before it is ever fought.”
Stated differently, publicly disclosed data is about as sure of a sure thing you can get in the market. But to actualize this advantage requires being fast, being first…ultimately, this means not you. Fortunately, we still have some cards to play.
As the machines move billions of dollars on material corporate disclosures, it’s inevitable that they leave structural footprints. Over time, the magnitude of footprints is associated with certain quantitative setups. For Walmart stock, the algos have historically bought up WMT when it suffers from extended pessimism. While this doesn’t guarantee that every downturn leads to upside, the odds appear weighed in the contrarian bulls’ favor.
At the current juncture, WMT stock has printed only three up weeks over the last 10 weeks, resulting in a downward slope. This 3-7-D quant sequence has materialized just 10 times on a rolling basis since January 2019 — and in nine of the instances, WMT has moved higher over the next 10 weeks.
Specifically, the expected forward 10-week distribution is between $105 and $130, with probability density peaking at around $118. In contrast, the random baseline features a distribution of outcomes ranging between roughly $109 and $117, with peak probability density at $113.50. On average across the spectrum, you’re looking at about a 4% positive variance between the signal and the baseline.
A Potentially Underpriced Walmart Stock Options Spread
Among the options-related ideas to consider, I’m tempted by the 115/116 bull call spread expiring Aug. 14. First, this expiration occurs before the earnings disclosure, thus eliminating the chaos that could erupt for a post-earnings options chain. Second, there’s a potential argument that this spread is mispriced in your favor.
Right now, Wall Street pegs a probability of profit of only 25.5% that WMT stock will hit the breakeven price of $115.36 by expiration. This figure stems from the implied volatility of the options chain in question being run through the Black-Scholes formula, which itself assumes a risk-neutral, lognormal environment.
Indeed, when I aggregate all the risk profiles in my model — thus making the framework effectively risk-neutral from an empirical standpoint — I get a probability of profit of 26.9%. That’s really close to what the Black-Scholes model is calculating so we would be on the same page.
However, my hypothesis is that market transitions (especially transitions from bearish to bullish cycles) are risk-dependent. As such, of the 10 times that WMT stock has flashed the 3-7-D signal, the ticker has exceeded the $115.36 breakeven price a total of seven times by week 4 (Aug. 14). Therefore, the observed probability of profit may be 70%. What’s more, the probability of reaching the $16 strike is 60%.
Granted, you don’t want to get too excited because of the ridiculously small sample size. Still, I mention this opportunity precisely because the aforementioned quant signal is so rare — and has previously forecasted upside.
For those who want to dial down the speculation, the 114/115 bull call spread (also expiring Aug. 14) is an intriguing idea. Here, the observed probability that Walmart stock rises through the $115 strike at expiration is 70%.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
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