Wal-Mart (WMT) scores an upgrade
From a long-term perspective, Wal-Mart shares have been sideways trending for over a decade, bouncing between the 42 and 62 levels for the past 11 years (note that Citigroup’s new target price is above the upper rail of this range). On a closer scale, the stock is sitting in the middle of this broad range and appears as though it could break higher in the short term.
Whether you think WMT will move higher, drop lower, or stay in a range, there is likely to be an options strategy that corresponds with your view. Below are two examples of some ways options investors could trade WMT right now. These are not buy-sell-hold recommendations – just a pair of potential strategies in the bullish and bearish camps.
Bullish Option Strategy: Long Call
Investors who expect Wal-Mart to move higher could buy the September 52.50 calls for $4.30 a piece (the price in mid-afternoon trading on Monday). These calls currently have $2.98 in intrinsic value and roughly six months in time value. The stock would need to be trading at $56.80 or above when these options expire in order for the call buyer to be profitable at expiration. Call buyers can lose as much as 100% of the premium paid for the option but can book unlimited profits if the underlying stock rallies.
Bearish Option Strategy: Synthetic Short Stock (Split-Strikes)
Traders who believe Wal-Mart is poised to move lower could consider a synthetic short stock (split strikes) position, created by buying a January 2011 50 put for $1.90 and simultaneously selling a January 2011 60-strike call for $1.50 (prices as of late afternoon, Monday). The net debit for this spread is 40 cents apiece. Losses are theoretically unlimited if the stock rallies above 60, but gains are significant if WMT drops below the 50 level. Between the 50 and 60 strikes, the loss is limited to the debit paid for the spread.
Think Wal-Mart is destined to continue in its range, or is a breakout due in the short term? Let us know what you think and how you might consider trading the shares of the world’s largest retailer.
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