Retail and wholesale giant Walmart will report its second-quarter earnings on Aug. 16. With the options market pricing in just a 4% move on the earnings event, investors who expect a larger move can consider placing a long straddle to take advantage of increased volatility in Walmart stock.
A long straddle is an options strategy where an investor buys a call and a put option of the same strike and same expiry. By placing a straddle an investor takes no view of the direction of shares on inception. Instead, the trader believes shares could move significantly and more than the market expects in either direction.
With Walmart stock trading around 126, investors can consider placing a straddle by buying both the 126 call and 126 put on the Aug. 19 monthly expiry. This trade can be placed for a debit of $6.35, which also coincides with the maximum loss of $635 in the unlikely event that shares trade at exactly $126 on expiration.
In the event of a large move, the profit potential for this trade is unlimited. An investor will earn a profit if Walmart is trading below 119.65 or above 132.35 when the options expire on Aug. 19.
Walmart To Report Earnings Aug. 16
The current implied volatility for these options is 31.5% while Walmart has realized 32.5% annualized volatility over the past 30 days.
More importantly, investors will be exposed to Walmart's second-quarter earnings, on Aug. 16. EPS is currently estimated at $1.63, with $150.8 billion in revenue. While Walmart's earnings are typically uneventful — the current implied move is similar to the average move over the past 12 quarters — shares plummeted over 11% last quarter on poor results.
For investors who expect any carry-over in the volatility from Q1, a long straddle certainly makes sense. In a challenging environment highlighted by inflation, volatile interest rates, and labor shortages, there are certainly storylines for the stock to move.
Walmart Cuts Profit Guidance Ahead Of Results
Perhaps in anticipation of poor results, Walmart cut its profit guidance last week, saying it expected adjusted earnings per share for the full year to now fall 11%-13%, sending shares sharply lower.
This could be a sign of caution that the potential big news has already been priced in and could justify the lower volatility for the event.
Walmart stock has an IBD Composite Rating of 46 and is trading in a base below its 200-day moving average. It is trying to hold above its 50-day moving average.
