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Put Trading Builds Toward Wal-Mart Stores

Examining lingering skepticism toward a mega-retailer

by Jocelynn Drake (jdrake@sir-inc.com) 11/24/2008 3:16 PM

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Wal-Mart Stores (WMT: sentiment, chart, options) has edged higher this afternoon, with a little help from an upgrade at William Blair from "market perform" to "outperform." As it stands now, there isn't a lot of room for the love fest on WMT to grow. According to Zacks, the stock has earned 13 "buy" or better ratings and just 3 "holds."

However, it may come as a surprise that Wall Street is just about the only group that is optimistic when it comes to the mega-retailer. Options players have loaded up on bearish bets on WMT in anticipation of weak sales figures this holiday shopping season. The Schaeffer's put/call open interest ratio for WMT stands at 1.28, as put open interest easily outnumbers call open interest among options set to expire in less than 3 months. This reading is also higher than 89% of all those taken during the past 52 weeks, indicating that short-term speculators have been more pessimistically aligned just 11% of the time during the past year.

Digging deeper into the stock's options backdrop, we find that during the past 10 trading days, the International Securities Exchange has reported an average of 1.5 puts purchased to open for every 1 call purchased to open. This ratio of puts to calls is higher than 85% of all those taken during the past year, indicating a growing preference of bearish bets toward the retailer.

Looking at option trading on Friday, the stock saw more than 3,600 contracts added to its December 52.50 call and more than 3,000 contracts added to its December 55 call. It is likely this activity could be the result of a credit spread, with the trader anticipating that the shares will finish below the 52.50 strike when December options expire.

Meanwhile, the deep out-of-the-money January 37.50 put added more than 8,000 new positions on Friday. This significant position appears to be a bet that the company will report disappointing holiday sales figures this year, sending the shares sharply lower.

Technically speaking, the stock is sitting on a year-to-date gain of more than 11% -- joining the ranks of the few equities with an actual gain in 2008. The shares rallied sharply from their September 2007 lows to their September 2008 peak, gaining more than 42% along the way. The security has since pulled back to hover in the 50 area for support. The 50 region is significant because it marks a rough 50% retracement of the stock's rally from its September 2007 low to its September 2008 high.

What's more, the 50 strike is the site of significant put open interest, which could serve as an extra layer of support for the region. The December 50 put is home to more than 50,700 contracts, while the January 2009 50 put is the site of more than 103,600 contracts. This accumulation of bearish bets could help to buoy the shares during the near term.

Traders should keep a close watch on the 50 level as support. Furthermore, any positive sales reports from the company could result in sharp rallies for the shares as the bears are finally shake loose, resulting in fresh buying pressure.

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Put Trading Builds Toward Wal-Mart Stores

Examining lingering skepticism toward a mega-retailer

by Jocelynn Drake (jdrake@sir-inc.com) 11/24/2008 3:16 PM

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