Call Options Cheap on Upgraded Walmart Stock

Short-term WMT options are pricing in tame volatility expectations

by Karee Venema

Published on Jan 23, 2019 at 9:57 AM
Updated on Jun 24, 2020 at 10:16 AM

The shares of Walmart Inc (NYSE:WMT) are trading up 1.7% at $99.08, after Morgan Stanley upgraded the Dow stock to "overweight" from "equal weight," and raised its price target to $110 from $107. Analyst Simeon Gutman waxed optimistic over WMT's "unprecedented commitment to cost control," and said it expects Walmart U.S. to "be one of the few retailers to grow earnings in 2019."

Most analysts are already bullish on WMT, with 13 of 22 maintaining a "buy" or better rating at last night's close. However, the average 12-month price target of $106.93 is a slim 7.8% premium to current trading levels.

Options traders have been growing more optimistic toward WMT stock, too. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the equity's 10-day call/put volume ratio has jumped to 2.74 from 1.00 in the past two weeks, and now ranks in the 60th annual percentile. In other words, calls have been bought to open over puts at a slightly quicker-than-usual clip.

Meanwhile, short-term options are pricing in unusually low volatility expectations at the moment, per Walmart's Schaeffer's Volatility Index (SVI) of 17% in the 8th annual percentile. Plus, the stock's 30-day implied volatility skew of 15.3% registers in the 93rd percentile of its 12-month range, indicating calls have rarely been cheaper relative to puts.

On the charts, the retail stock has rallied hard off its late-December lows near $86, and is up 6.5% already in 2019. However, WMT shares are staring up at the century mark, which has not been toppled on a daily closing basis since Nov. 14.


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