May 17, 2023

Walmart (WMT)

Walmart (WMT) is due to announce earnings Thursday before the opening bell.

The stock is currently trading for 149.68.

IV Rank: 29.7
IV: 33.85%

Expected Move for the May 26, 2023, Expiration Cycle: 143 to 156

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 143 to 156.

If we look at the call side of WMT for the May 26, 2023, expiration, we can see that selling the 157.5 call strike offers an 86.10% probability of success. The 157.5 call strike sits just above the expected move, or 156.

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 143. The 140 put, with an 87.70% probability of success, works.

We can create a trade with a nice probability of success if WMT stays within the 17.5-point range, or between the 157.5 call strike and the 140 put strike. Our probability of success on the trade is 86.10% on the upside and 87.70% on the downside.

Moreover, we have a 5.2% cushion to the upside and a 6.5% margin of error to the downside.

If one wanted to make a trade, below are the potential strikes that make the most sense or are at least a starting point for a trade. At the time of the trade, my hope is that I can increase my “cushion,” or probabilities of success on the trade, as I would be far more comfortable. However, the premium must still make sense.

Here is the potential trade (as always, if I decide to place a trade in WMT, I will send a trade alert with updated data):

Simultaneously:

Sell to open WMT May 26, 2023, 157.5 calls

Buy to open WMT May 26, 2023, 162.5 calls

Sell to open WMT May 26, 2023, 140 puts

Buy to open WMT May 26, 2023, 135 puts for roughly $0.62 or $62 per iron condor.

Our margin requirement would be roughly $438 per iron condor. Again, the goal of selling the WMT iron condor is to have the underlying stock stay below the 157.5 call strike and above the 140 put strike immediately after WM earnings are announced.

Here are the parameters for this trade:

The probability of success – 86.10% (call side) and 87.70% (put side)
The maximum return on the trade is the credit of $0.62, or $62 per iron condor
Max return: 14.2% (based on $438 margin per iron condor)
Breakeven level: 158.12 – 139.38.

As always, if you have any questions, please do not hesitate to email me at andy@cabotwealth.com.

Andy Crowder

Andy Crowder is a professional options trader, researcher and Senior Analyst at Cabot. Formerly with Oppenheimer & Co. in New York, Andy has leveraged his investment experience to develop his statistically based options trading strategy which applies probability theory to option valuations in order to execute risk-controlled trades. This proprietary strategy has been refined through two decades of research and real-world experience and has been featured in the Wall Street Journal, Seeking Alpha, and numerous other financial publications. Andy has helped thousands of option traders learn and implement his meticulous rules-driven options trading strategies through highly attended conferences, one-on-one coaching, webinars, and his work as a financial columnist. He currently resides in Bolton Valley, Vermont and when he’s not trading, teaching and writing about options, he enjoys spending time with his wife and two daughters, backcountry skiing, biking, running and enjoying all things outdoors.