Walmart (WMT) Option Traders Oddly Optimistic

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Walmart (WMT) Option Traders Oddly Optimistic

Traders have pulled down the share price of Walmart Inc. (WMT) ahead of the company’s quarterly results report. Despite this, option traders paid a premium since they expected the stock to climb. It seems that they are anticipating really excellent news. There is no way to foresee the direction of a stock following an earnings report. A comparison of the price action of stock prices and option prices, on the other hand, shows that if Walmart shares jump, diverging away from its 20-day moving average in the first few days after the announcement, uptrend-focused traders will be in a position to profit the most.

Key Takeaways

  • Traders and investors have pulled down the price of Walmart stock ahead of the announcement.
  • Walmart’s stock price has been ending much higher than its 20-day moving average.
  • Put options are priced for a higher loss, whereas call options are priced for a lesser gain.
  • Support and resistance levels based on volatility allow for a big shift in either direction.
  • This setup provides traders with the possibility to benefit from an unexpected outcome.

Option trading represents the activities of investors who want to protect their positions or speculators who want to profit from correctly forecasting unexpected moves in an underlying stock or index. That means option trading is literally a bet on market probabilities. By comparing the details of both stock and option price behavior, chart watchers can gain valuable insight, although it helps to understand the context in which this price behavior took place. The chart below depicts the price action for Walmart’s share price and the setup leading into the earnings report.

Current Trend

The stock’s one-month trend shows that it is trading in a medium range with a small negative tendency. It is worth noting that Walmart plummeted to $139 per share at the beginning of February, with only a minor retracement as the announcement date approaches. The price settled in the center of the range shown by the technical studies on this chart. The studies are built on 20-day Keltner Channelindicators. These are price levels that are multiples of the stock’s average true range (ATR). This array highlights how the price has moved from the lower extreme back to its typical range and remained there. This change in the price of Walmart stock suggests that investors may be cautiously bullish about the impending report.

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Tip

The Average True Range (ATR) has become a widely used technique for illustrating historical volatility over time. The average number of time periods employed in its computation is 10 to 20, which encompasses one to two weeks of trade on a daily chart.

In this environment, where Walmart’s price trend has been maintaining in a medium range, chart watchers may see that traders and investors are expressing concern about earnings. As a result, chartists must decide if the change reflects investors’ expectations for a good earnings release or not.

Option trading data may assist chart watchers build an impression about investor expectations by providing extra information. Option traders are preferring calls over puts, indicating that investors anticipate positive news from the corporate report. A comparison of the volatility range indicated on the chart by the purple lines and the purple box in the backdrop provides more evidence. Despite being in such a narrow range, prices are moving toward the top part of the volatility range. This pricing position shows that investors may not be as negative as they look.

Tip

The Keltner Channel indicator shows a series of semi-parallel lines based on a 20-day simple moving average, as well as an upper and lower line. This channel indicator is an effective visualization tool for charting historical volatility since the upper lines are produced 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.

Trading Activity

Option traders realize that Walmart shares are ordinary and have priced their options as a bet that the company would close inside one of the two boxes illustrated in the chart between today and Feb. 19, the Friday after the publication of the earnings report. The price offered by call option sellers is shown by the green-framed box. If prices rise, there is a 72% likelihood that Walmart shares will settle inside this range at the end of the week. The red box reflects the pricing for put options, with a 74% chance that prices will fall after the announcement.

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It is worth noting that over 69,000 call options were exchanged on Tuesday, compared to about 28,000 put options, illustrating the bias that option purchasers had. The fact that just 28% of deals were put options suggests that option traders are modestly optimistic, as seen in the figure below.

A 10-day Keltner Channel analysis set at four times the ATR yielded the purple lines on the chart. This metric tends to provide closely connected price action zones of strong support and resistance. These areas appear when the channel lines make a noteworthy turn during the last three months. The levels that the turns represent are shown in the chart below. What stands out in this chart is how close the call and put prices are, with lots of room to go on either side. This shows that option purchasers aren’t certain about how the firm will report. However, the put option range is substantially bigger than the call option range, indicating that investors are skeptical about the company’s performance.

These support and resistance levels demonstrate a wide variety of price support and resistance. As a consequence, any news, whether unexpectedly good or negative, may take investors off guard and result in an abnormally significant shift. Walmart shares gained by less than 2% in the days after the prior earnings report. Investors may not anticipate the same tiny price movement after this news. With so much opportunity for movement in the volatility range, share prices may increase or fall more than predicted.

Market Impact

Because of the company’s scale, the impact of Walmart’s earnings report is significant in the market. Nonetheless, Walmart shares normally fluctuate very little following results, so the outcome has no direct impact on index prices. However, regardless of what the report says, it is expected to have a substantial influence for consumer staples companies. With more than half of the S&P 500 components having reported profits by now, and the vast majority of them exceeding expectations, investors will expect Walmart to outperform. Anything less would be a surprise. A favorable report might boost consumer staples stocks and exchange traded funds (ETFs) like State Street’s Consumer Staples Select Sector SPDR Fund (XLP), but a bad report would weigh on XLP as well as broad market issues like State Street’s SPDR S&P 500 ETF Trust (SPY).

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The Bottom Line

Before the company’s earnings release, option traders on Walmart chose call options over put options by a wide margin. Even though they’ve been selling shares lower recently, investors are plainly anticipating favorable news. If a terrible report comes out, Walmart shares may fall significantly, but traders are doubting that probability. The call options are now priced for Walmart to make a taller-than-usual leap. This indicates that options traders are either expecting extremely favorable news or holding grossly overvalued call options. The extent of the volatility price range is wide enough to outperform both call and option prices, allowing for a substantial move. However, Walmart stock is not renowned for making significant swings in the five days after an earnings report.

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