WalMart – What to do?

Today (5/19/15), WalMart released earnings that were a disappointment to the market. The stock is down well over $3, so most WMT owners are feeling quite a bit of pain today. We are not feeling that pain Our Deep Pocket position is just fine.

Our analysis of WMT has put it in a bear market since mid-February. We have continued to trade it, but without any expectation that the stock would be rising. It has continued to decline from about $91 in January to the mid-70’s today. We expect more of the same until proven otherwise. We should trade WMT so that we can maximize the daily decay knowing that we can eventually turn this into a profitable position for the year. Last year, we profited $3500 in WMT.

Today, we are down $2100 on this position since Jan 1. Our position structure going into today was: <> long 900 shares and short nine weekly 78 calls. <> This is known as a covered call position and yesterday, when WMT closed at around $80, it was $2 In The Money. We were able to absorb a $2 drop in the stock without any losses. It has fallen more than that, so we will have an additional loss today.

However, stock movements always create opportunities in the options market. Our short 78 calls lost nearly all of their value today and we placed an order to buy them back at 5 cents each. That order was filled and now we will look at selling new calls – they will just be at a lower price.

Yes, the stock has fallen but we can now sell new calls and continue to create income with this position. If we owned the 900 shares of WalMart without a corresponding option position, we would have been down nearly three thousand dollars. Instead, as the stock fell in value, our short options gained value and offset much of the drop.

We will now wait patiently for a day when WMT stock is up, and then begin selling calls against our long stock position. This will lower our risk and increase our income – which is always the goal.

One of our most important rules is this: We try to always sell puts on days when the underlying is down at least 1%, and sell calls on days when it is up at least 1%.

Stay optioned, my friend.


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