Walmart (WMT)
As discussed in our weekly issue last week, and on our weekly call, I will be taking a position in Walmart (WMT) today. WMT is due to announce earnings before the opening bell Tuesday (August 16). The stock is currently trading for 133.27.
IV Rank: 81.1
Expected Move for the August 19, 2022, Expiration Cycle: 127 to 139
Knowing the expected range, I want to place the short call strike and short put strike of my iron condor outside of the expected range, in this case outside of 127 to 139.
If we look at the call side of WMT for the August 19, 2022, expiration, we can see that selling the 142 call strike offers an 87.72% probability of success. The 142 call strike sits just above the expected move, or 139. We can define our risk by buying the 147 call, thereby creating a five-strike-wide bear call spread at the 142/147 call strikes.
Now let us move to the put side. Same process as the call side. But now we want to find a suitable strike below the low side of our expected move, or 124. The 124 put, with an 85.91% probability of success, works. Staying with a five-strike-wide spread, I can buy the 119 put to define our risk and create a bull put spread at the 124/119 strikes.
We can create a trade with a nice probability of success if WMT stays within the 18-point range, or between the 142 call strike and the 124 put strike. Our probability of success on the trade is 87.72% on the upside and 85.91% on the downside.
Moreover, we have a 6.6% cushion to the upside and a 7.0% margin of error to the downside …
Here is the trade:
Simultaneously:
Sell to open WMT August 19, 2022, 142 calls
Buy to open WMT August 19, 2022, 147 calls
Sell to open WMT August 19, 2022, 124 puts
Buy to open WMT August 19, 2022, 119 puts for roughly $0.67 or $67 per iron condor
Our margin requirement would be $433 per iron condor. Again, the goal of selling the WMT iron condor is to have the underlying stock stay below the 142 call strike and above the 124 put strike immediately after WMT earnings are announced.
Here are the parameters for this trade:
The probability of success – 87.72% (call side) and 85.91% (put side)
The maximum return on the trade is the credit of $0.67, or $67 per iron condor
Max return: 15.5%
Breakeven level: 142.67 – 123.33