Can Walmart (WMT) Reverse Trend to the Upside?

Call options outnumber puts in open interest

As one of the world’s biggest retailers and one of the largest grocery providers in the United States, Walmart Inc. (WMT) has experienced strong profit and revenue growth as consumers have changed their buying patterns during the COVID-19 pandemic. Regardless, investors have recently bid down the share price of Walmart ahead of the company's fiscal fourth quarter earnings report. Analysts expect the company to announce $1.50 in earnings per share (EPS) to go with $151.8 billion in revenue.

Investors will be watching Walmart's U.S. comparable sales growth, a key metric. Comparable sales, also referred to as same-store sales in the retail industry, measures the sales performance of the company's stores that have been open during the previous 12 months. This gauges a company's ability to generate additional revenue from established stores. Wall Street currently expects Walmart's U.S. comparable sales growth, excluding fuel, to be 6.1% year over year.

Consider that the open interest for Walmart stock features a relatively low number of call options compared to its 52-week average. However, even this low amount of calls exceeds the number of puts in the open interest. Investors appear to be selling downside puts, while buying upside scale, revealing a relatively bullish sentiment toward the Walmart earnings report.

Key Takeaways

  • Traders and investors have bid down Walmart stock ahead of earnings. 
  • The Walmart share price was recently rejected by the 20-day moving average on a daily chart. 
  • Walmart has recently outperformed other discount retailers as the market as a whole has experienced a prolonged sell-off.
  • The volatility-based support and resistance levels allow for a stronger move to the upside.
  • There has been an intriguing amount of multi-legged option trades that lend themselves to Walmart shares rising after earnings.

Walmart is a top 10 holding of State Street's Consumer Staples ETF (XLP) by weight. The sector has recently outperformed the market at large. XLP has fallen 2.5% year to date, while State Street's S&P 500 Index ETF (SPY) has shed 6.6% in the same time frame. Since the beginning of 2022, Walmart shares have declined 7.1%.

Most discount retailers belong to the consumer staples sector, which focuses on essential products used by consumers. This category includes things like foods and beverages, household goods, and hygiene products as well as alcohol and tobacco. These goods are those products that people are unable—or unwilling—to cut out of their budgets regardless of their financial situation.

Below is a chart comparing Walmart with XLP, and three of the largest discount retailers behind Walmart—Costco Wholesale Corporation (COST), Target Corporation (TGT), and Dollar General Corporation (DG).

Comparison of WMT with XLP, COST, TGT, and DG

This chart helps to highlight how discount retailers have all relatively underperformed their sector of late. The consumer staples sector has shown relative strength recently, staving off the wider downward trend of the market at large, as this sector is considered a "safer" haven for investors during times of rising interest rates.

Walmart has outperformed its competitors, as illustrated by this chart. Walmart is also the first of these companies to report earnings for the quarter, which could offer a barometer by which the rest of the retailers' earnings will be compared to. One big difference setting Walmart apart is that the company remains the largest food retailer in the country, with a more than 26% share of all groceries sold.

Price Action

An analysis of recent option activity combined with technical analysis of share price movement can help chart watchers gain valuable insight into the overall sentiment toward Walmart stock. The chart below depicts the recent price action for the Walmart share price as of Tuesday, Feb. 15.

Recent price action for Walmart

This chart illustrates how Walmart's share price has drifted lower as the earnings announcement approaches. After trading in a slightly above average range above the 20-day moving average to begin 2022, Walmart's share price has engaged in two downward trends, each highlighted with a red arrow. Despite the brief respite to the upside sandwiched in between these two trends, Walmart has failed to close above its 20-day moving average and has continued lower.

The purple bands on this chart are an extreme historical volatility range formed by 4 standard deviations of 20-day Keltner Channel indicators, which depict price levels that represent a multiple of the average true range (ATR) for Walmart stock. ATR is a standard tool for illustrating historical volatility over time. These bands could be considered to represent the extreme ranges of option pricing.

Tip

The average true range (ATR) has become a standard tool for depicting historical volatility over time. The typical average length of time used in its calculation is 10 to 20 time periods, which includes one to two weeks of trading on a daily chart.

It's notable that these bands widened during the brief upward trend in between the downward trends highlighted in red. This could mean that, during that time, option traders were skeptical if the trend could continue. The purple bands have remained relatively wide ahead of the earnings report, indicating that option traders remain unsure of the current price direction for Walmart stock going into earnings.

Tip

The Keltner Channel indicator displays a set of semi-parallel lines based on a 20-day simple moving average and an upper and lower line. Because the upper lines are drawn by adding a multiple of ATR to the average and the lower lines are drawn by subtracting a multiple of ATR from the average price, this channel indicator makes for an excellent visualization tool when charting historical volatility.

Volume Profile and Options Look

A comparison between price action and option trading can provide insight into the sentiment of traders and investors toward a company's performance in the near future. However, further context of price action in terms of volume could illustrate areas of support or resistance, which could provide context to option open interest. The chart below illustrates the recent price action of Walmart, in addition to a price-based volume pattern on the left-hand side.

Recent price action of Walmart with a price-based volume pattern

There are two notable zones of price-based volume activity on this chart. These two zones are thin on volume; however, what little volume they do have is primarily buying. They are highlighted on this chart by the green rectangles. These areas could prove to be downside support if the Walmart price action were to fall after earnings.

Recent option trading volumes on Tuesday for Walmart favored calls over puts by a more than 3.5-to-1 ratio. In addition, the open interest features 368,000 calls compared to 268,000 puts. Both of these figures reflect a bullish outlook toward Walmart stock; however, further analysis is required. 

For Feb. 18, the next monthly option expiration date, the single option with the highest open interest is the $150 call, with 18,000. This represents 11% upside to the current share price of Walmart stock. However, it should be noted that the current implied move for earnings-based option straddle pricing is 4%. This could mean that option traders are selling this option to collect elevated premiums ahead of earnings.

Significant Trades

On Feb. 4, a trader opened 6,000 straddles on the Feb. 18 $140 strike. The total cost for this position was $6.49, or $649 per contract. If long this straddle, this position would be profitable if Walmart stock moved above $146.49 or below $133.51 by option expiration. If short this straddle, this position would be profitable if Walmart remained in that price range. The current pricing for this straddle is $7.23, or $723 per contract, which represents an 11% increase from when the trader put on this trade.

On Feb. 8, a trader opened 12,000 straddles on the March 18 $150 strike. The total cost for this position was $13.47, or $1,347 per contract. If long this straddle, this position would be profitable if Walmart stock closed above $163.47 or below $136.53 by option expiration. If short this straddle, this position would be profitable if Walmart shares remained in that price range. The current pricing for this straddle is $17.08, or $1,708 per contract, which represents a 26% increase from when the trader put on this trade.

Wrapping Up

The Walmart share price has trended downward since the prior earnings report, despite brief periods of upward price movement. Walmart shares have lagged the market at large but are still outperforming other discount retailers in the consumer staples sector. Option traders appear to be buying large amounts of call options ahead of earnings, implying a bullish sentiment. If these bets were to unwind, it could place unforeseen downward pressure on Walmart stock.

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