CNBC's Option Guru Previews Walmart Trade Ahead Of Q2 Report

Retail giant Walmart Inc WMT is scheduled to report second-quarter results Thursday morning, and the options market is pricing a 4% move in either direction, CNBC contributor Michael Khouw said during Friday's "Options Action."

What Happened

Walmart's stock is not known for volatile moves in reaction to earnings, and expectations for a 4% move are below what has been seen over the past two years, Khouw said.

Over the past two years, the stock has shown instances of both the a 10% move to the upside and a 10% move to the downside after reporting earnings, he said — so investors shouldn't be caught off guard if Thursday's trading action consists of a double-digit move.

Why It's Important

Heading into earnings, Walmart's stock is trading at around 22 times forward earnings, which is "not particularly cheap" for a company showing just 2% topline growth, Khouw said.

On the other hand, options on the name are "relatively cheap" and the options pro said he is looking at the October 105 - 95 put spread.

This strategy consists of buying the 105 put options at $2.85, based on Friday's trading price, and selling the 95 puts for 80 cents. The net result is a cost of around $2 per contract.

What's Next

"I don't think there's very much risk of [Walmart's stock] falling below that level," Khouw said.

"And the idea is if it gets down to $103 — so that's $2 in the money and we've only spent $2. You might feel like that won't be profitable. The truth is it actually will be profitable if it hits that level and obviously if it breaks below that then you have the opportunity to make substantially more."

Walmart shares were down 0.99% at $106.18 at the time of publication Monday. 

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Photo by Walmart via Wikimedia.