New Trade Alert for (WMT)

Wal-Mart           

Buy March $60.00 Call @$8.25 or less

Risk Rating: 2     (1 = lowest   5 = highest)

Above Break Even Probability: 49%

Probability of maximum loss: 14%

Place Stop Loss at half of premium paid.

America Retail Rebound

Stock unwinding has hurt some of the BIG BOYS the worst.  DOW components Exxon and Wal-Mart have been among the poor performers and leading losers in 2015.

A bounce from the August extreme sell off lows, the first 10% correction since 2011, has major market indexes back to positive over the last 52 weeks.  The YTD performances leaves room for last quarter improvement as a technical base has been built after the stock shake out.

Leading losers has the DOW still down a modest 4% in 2015 though the rally run is more than 1500 industrial index points in the last six weeks.  Of the 30 Blue Chips only 13 are in the Green for 2015.

The worst return in the DOW since January 1 belongs to behemoth Wal-Mart down 22% so far this year.  WMT had regularly outperformed the DOW until this recent draw down.  Look for a snap back attack in an out of favor money generator.

A delayed retail reaction to lower gas prices aiding consumer spending has perplexed prognosticators.

FOLLOW THE MONEY… a fall season of cheap gasoline may be all the reason to see more spending at America’s largest retailer that is trading at a multiyear discount.

Technically, the price pattern has seen WMT trade mostly between $70 and $80 over the last years.  The upside target at the $80 channel top resistance is 20% above at the unchanged level for 2015.

A stock substitution strategy using options ties up less capital and has absolutely limited risk to the premium paid.  An option instead of buying the shares also has greater staying power for long term trend development.

The March option has almost six months for Bullish development.

An In-The-Money option gives you the right to be long the shares from a lower strike price and costs much less than the stock itself.

The Options Way: Unlimited Upside Potential with Limited Risk.

A Wal-Mart long call option can provide the staying power in a potential bullish trend extension.  More importantly, the maximum risk is the premium paid.

One major advantage of using long options instead of buying or selling shares is putting up much less money to control 100 shares — that’s the power of leverage.

Choosing an option can sometimes be a daunting task with all of the choices and expiration months.  Simply put, traders want to buy a high probability option that has enough time to be right.

The option strike price is the level at which you have the right to buy without any obligation to do so.  In reality, you rarely convert the option into shares. Simply sell the option you bought to exit the trade for gain or loss.

There are two rules options traders need to follow to be successful.

Rule One:  Choose an option with 70%-plus probability.  The Delta is a measurement of how well the option reacts to movement in the underlying security.   It is also important to buy options that payoff from only a modest price move.

There is no need to ONLY make money on the all but infrequent long shot price explosions.

Good Options can profit from only modest directional moves.

Any trade has a fifty/fifty chance of success.  Buying options ITM options increase that probability.  That Delta also approximates the odds that the option will be In The Money at expiration.

Buying better options are more expensive, but they are worth it — the chances of success are mathematically superior to buying cheap, long shot Out Of The Money lottery tickets that rarely ever pay off.

With WMT at $66.75, for example, an In The Money $60.00 strike option currently has $6.75 in real or intrinsic value.  The remainder of any premium is the time value of the option.
Rule Two: Buy more time until expiration than you may need — at least three to six months for the trade to develop.  Time is an investor’s greatest asset when you have completely limited the exposure risks.

Traders often buy too little time for the trade to develop.  Nothing is more frustrating than being right but only after the option has expired premature to the market move.

Trade Setup: I recommend the WMT March $60.00 Call at $8.25 or less. A close in the stock below $62 on a weekly basis or the loss of half of the option premium would trigger an exit.

An option play also has staying power with the ability to ride through Ups and Downs that would force most stock traders out of the position.

The option also behaves much like the underlying stock with a much less money tied up in the investment.  The Delta on the $60.00 strike call is 81%.

The March option has six months for bullish development.  This option is like being long the stock from $60.00 a price not seen in WMT since 2012 with completely limited risk.

The maximum loss is limited to the $825 less paid per option contract.   A money management exit will be placed a half of the premium paid so the risk is $400 if stopped out there.

The upside, on the other hand, is unlimited.

The WMT option trade break even is $68.25 or less at expiration ($60.00 strike plus $8.25 or less option premium).  That stands less than $1.50 higher than the current trade.

If shares hit the $80 price target the option would be worth $20 for a 150% return on investment.