Market Positioning On Walmart Before Earnings

One of the most iconic books on business out there is Sam Walton Made in America. As you finish the book, you get the following takeaways. Sam Walton was extremely consistent, committed to his customers and had alway an eye on price. He was obsessed with getting the best deal for his customer. 

Sam Walton is long gone, but those principles that he instilled in Walmart Inc. WMT are still there today. Negotiating with Walmart’s corporate buyers is well known to be one of the hardest things for a sales guy. Walmart buyers are constantly striving for the best deal, for the best price. 

That helps Walmart stay very competitive on price. Those prices attract a big chunk of the population that is looking for bargains. Why is this important for investors? Because Walmart Inc. WMT has an inverse relationship to the SPX Index.

That is because customers are looking to lower their monthly expenses. Less spending on discretionary goods and more on basics. When we reach that turn of the cycle, Walmart starts churning cash as customers become more attentive to their paycheck.

The performance of Walmart Inc. WMT has been good, and especially good in the last few weeks as we started seeing some pressure on SPX and QQQ. Another important correlation is the one with the 30 Years Treasury yield. When that goes down, Walmart Inc. WMT tends to over perform. That is because investors pile in 30Y Treasuries when recession hits, driving down yields. 

As we get closer to Walmart Inc. WMT earnings date, let's take a look at what the option market is saying and how investors are positioned. The option market can give us a gauge of the market sentiment as we get into the event. 

Options Positioning on Walmart Inc.

There are different ways we can look at this. Let’s start by looking at the entire option chain. What that does, is showing us current positioning for different maturities.

Source: Menthor Q Options Matrix

Walmart Net GEX (Net Gamma Exposure)

The current positioning looks positive throughout time. The weakness in SPX is obviously helping Walmart. On the GEX Normalized column we can see that there is a steady accumulation as we move down different expirations.

Then we can jump on the Net GEX. What this chart is doing for us, is breaking down Net GEX by different expiry. The strikes with most Net GEX can become very sticky and can be used to set up the strikes for your spread strategy.

Source: Menthor Q Options Model

Again, this confirms what we have already seen in the Option Matrix. Market is looking positively at Walmart. 

Walmart Term Structure

Next let’s look at the Term Structure, we want to see what implied volatility is doing. What we notice here is a spike in the Implied Volatility for OTM Calls. 

This means that on a net basis, investors seem to be going long OTM calls. There could be an expectation that positive earnings could bring the price of Walmart higher bringing those OTM calls “in the money”.

In yellow you can see how the Implied Volatility ATM Put/Call is definitely skewed towards the calls. 

Source: Menthor Q Options Model

To note that these volumes must be updated as we get closer to the earning event. But for the time being, the market seems to see Walmart as positive. The option market is a great indication of Sentiment coming from investors positioning on a stock or asset. By looking at the data we can study the market thoughts on a company.

Having said that, the last two weeks have been volatile, things can change fast. Keeping an eye on SPX performance can also help you get a better feel of what may happen to Walmart. Remember, the stock is a defensive one, and tends to outperforms in periods when the market goes risk off.

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