Schaeffer's Trading Floor Blog

The Wild World of Wal-Mart Stores, Inc. (WMT) Options

Are WMT speculators buying calls, or just avoiding puts?

by 5/30/2014 7:04 AM
Stocks quoted in this article:

In 2014, we've seen relative strength in big-cap stocks in general. But that outperformance is far from uniform. The King of All Retail, Wal-Mart Stores, Inc. (NYSE:WMT), has actually behaved pretty poorly, most especially in May.

Daily Chart of WMT since January 2014
Chart courtesy of TD Ameritrade

But that hasn't exactly stopped the optimism of options traders. This, from Bloomberg:

Warmer weather and forecasts for stronger economic growth are spurring options traders to bet Wal-Mart Stores Inc. (WMT) will rebound from this month's slump.

Bullish contracts cost the most in eight years relative to bearish ones, according to data compiled by Bloomberg. The stock has fallen 5.2 percent in May, headed for the worst month since August, after Wal-Mart missed quarterly profit estimates by the most ever.

Calls betting on a 10 percent advance in the shares cost 2.33 points less than puts wagering on a 10 percent drop, according to data on six-month options compiled by Bloomberg. That's the narrowest spread since 2006.

The top three most-owned Wal-Mart options are bullish. Calls with a strike price of $80 expiring in June and July had the highest open interest.

I'm not sure if it's a rush into calls so much as an avoidance of puts. Implied volatility overall in WMT has hit the skids.

WMT Schaeffer's Volatility Index since May 2013

That drop is of course in line with the drop in the CBOE Volatility Index (VIX). There's a big difference, though. The market itself is grinding higher and higher, whereas WMT is acting poorly.

Oh, and about that put demand. Here's the stock's Schaeffer's put/call open interest ratio (SOIR) over the past year:

WMT Schaeffer's put/call open interest ratio (SOIR) since May 2013

It tanked alongside the stock in the early part of the year, which is rather unusual. You generally see interest in puts pick up if those puts are actually working well. Likewise, you'd expect to see volatility pick up on stock declines, and that didn't exactly happen either.

All in all, I think it paints a somewhat bearish picture on the margins if you view options action through a contrarian lens.

If options players are consistent with the action in the underlying, I tend to find not much of a signal there. In the market as a whole for example, volatility is contracting into strength. That's just normal behavior. If put demand and volatility were lifting into strength, I'd find that bullish on the theory that the public at large wasn't believing the rally, but that's not what we're seeing.

In WMT, however, the options action suggests the public at large wants to fade the weakness … or at least isn't at all fearful it's going to continue much longer. In a vacuum, that's not encouraging in my opinion, as I'd rather they start bidding up the puts.

Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.

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