With the US and Israel launching a joint military attack on Iran, this major catalyst clearly has far-reaching implications for global markets. Given the many uncertainties that this conflict has created — especially for energy prices and their low economic results — sector startups like Walmart ( WMT ) look relatively attractive. But how you go about trading WMT stock is important and this is where the triage approach comes to mind.
As you might expect, the big-box retailer was the subject of many notable deals in Barchart’s Unusual Options Screener. Overall, most trades focus on short-term positioning around the spot price, potentially signaling tactical exposure rather than directional conviction. Sure, there were some trades that would be classified as “hopeful” but most of the participation seemed deliberate and disciplined.
A very important indicator came from the volatility skew of WMT stock. In fact, the volatility skew identifies the implied volatility (IV) – or potential movement of the stock – across the strike price spectrum of a given options range. Stated differently, the Skew provides a visual interpretation of the distortion of the surface area of the volatility space, allowing retail traders to understand how the smart money is managing the risk profile.
I argue that the volatility skew is the most important indicator to study among all traditional options-related indicators because of its broad implications. For example, I don’t really care about IV as my indicator. If IV is high, it just means that the market is anticipating a move. Conversely, the skew tells you where the market is pricing this move.
For WMT stock, the upcoming March 20-month option series shows that the skew is very contained but has a high bias in the left-hand bounds (toward lower strikes). While no one is afraid, the smart money is more concerned with protecting against a big loss than it is with positioning for a big profit.
While we may have an understanding of the smart money risk position for Walmart stock, we need some way to translate this intel into a usable forecast. As a starting point of reference, we can use the expected move calculator, which includes data like IV in its estimates. For the March 20 expiration date, the calculator estimates a split between $121.62 and $132.58.
However, as I indicated, this distribution is a reference. As analysts, we need to determine whether this quote reflects the reality imposed by the current market sentiment regime. To the best of my knowledge, there is neither a calculator nor a screener that identifies probabilities of diet conditions. This is where you need a (human) analyst to help you cut through the noise.
This is where the triage method is most useful. As you know, WMT stock is a constant, one of the economic bellwethers. Therefore, we can reasonably assume that the sentimental structure of the benchmark S&P 500 Trust ETF (SPY) will reduce how to manage risk for WMT.
I believe this dynamic is especially meaningful for large scale events such as an attack on Iran. Essentially, fund managers place their risk first on the index level before risk positions collide with individual names such as WMT stock. Indeed, by analyzing the volatility skew of the SPY ETF (for the same March 20 date), we find similar risk management dynamics.
Basically, traders pay more to protect against downside losses than they expect to gain from upside. So, when we go back to the expected move calculator, we have a general understanding that – based on the smart money position – sophisticated players are likely to see WMT stock hit the upper range of this distribution.
However, it’s also clear that (at least for now) the smart money is still bullish on Walmart stock; Advanced players don’t abandon ship. This gives us reason to explore conservative debit side trading.
It may not sound like the most exciting idea but I’m excited about the 128/129 bull year release that ends on March 20th. This trade requires a net debit of $61, which is the most that can be lost. If WMT stock rises through the $129 strike at expiration, the maximum profit will come to $39, a payout of approximately 64%.
Of course, this doesn’t seem like a great deal when there are so many other shows that have huge payouts. However, this is where you need to factor in the IV, noting the Barchart where volatility is low. If this is the case, the chances of a strong upside in the near term will be minimal.
Additionally, with Smart Money more strongly positioned to protect the downside rather than the upside, the aforementioned spread seems reasonable. You’re not risking a lot of money per spread and a 64% payout over the next few weeks is nothing to scoff at.
As of the date of publication, Josh Enomoto had no positions (either directly or indirectly) in any of the securities mentioned in this article. All information and data in this article is for informational purposes only. This article was originally published on Barchart.com
