- Today's stock is gonna
be Walmart, symbol WLMT.
We'll discuss should we
pass or should we play?
(upbeat music)
Hello, everyone.
My name is Brian Overby.
I am the Senior Options
Analyst at Ally Invest.
- And I'm Lindsey Bell,
Chief Investment
Strategist at Ally Invest.
- Well, Lindsey, we've finally
got a little bit of chop
in the marketplace over the last few days.
What's driving the market
higher today though?
- Yeah, we're seeing a big update
this Monday morning, Brian.
And it comes after a week last week,
that was one of the worst
weeks in the last two months.
So definitely a welcomed change
in direction in the market this morning.
But what's driving it?
It's really all about the same things
that have been driving the
market over the last month,
the rebound from the March 23rd bottom.
It's been all about the
Fed and all about any news
that we can find on the
development of vaccines
or treatments for the Coronavirus,
and we got both of those
in the last 24 hours.
So Federal Reserve
Chairman, Jerome Powell,
he was on 60 Minutes last
night, in case you missed it,
And he really got the rally
started here by talking
about how, you know, the
Fed is not out of ammo.
They have plenty to do to continue
to help support the economy to return
to a normal growth environment
once we get past it.
This corona virus pandemic, he said,
"Listen, I want to count the
American economy out here."
And the one thing that
he did say was that,
"Look, the one thing that can prevent us
"from having a full economic
recovery more quickly,
"would be the lack of a
treatment or a vaccine."
And guess what happened
this morning, Brian,
we got news of a vaccine,
positive news of the vaccine
that Moderna is working on currently.
And I don't know if you
saw that stock pulled up,
but that stock is soaring this morning
up more than 20%, 25% something like that.
It's been a little low
volatile this morning.
But they had positive results
from their phase one trial,
which involves humans
taking their vaccine,
and they're saying that
they're seeing positive results
in every single person
that was in the trial,
and they're building antibodies
against the Coronavirus.
So this is a very big positive have news.
So I think combined,
you're getting the one
to power of the Fed and
news on this treatment today
that's really setting up
the week for a strong start.
So that's great.
We also got some economic
news out this morning
that was better than expected,
Homebuilder confidence,
mortgage applications actually
have been improving back
to levels that we saw prior to the crisis.
So it seems like individuals
or consumers are willing
to look past this and that's
why one of the stocks that
we're gonna look at to
today is one in the,
what has been the beaten up
retail space, but Walmart is one
of the outstanding stocks
within the retail space.
One of the winners, I guess,
when you think about retailers
in the in the Coronavirus crisis
because of their online presence,
but I'll get into that in a bit.
But this really is the week where
we get retail earnings
season kicking off in earnest
and we're starting with Walmart.
But Brian, I know I got a little
off track there a little bit.
We're looking at the S&P 500 chart,
I think what was really
interesting about last week,
it got pretty nerve wracking
when the index moved
below that 20 day moving average.
Neither of us are technicians,
but we do know and believe
that the market has been trading
on technical patterns more
recently, especially when there's
this lack of fundamental
clarity about the future
and the economic growth that we're going
to see in the future,
and we broke below that,
but this morning, we're above it.
Where are we at from a technical
perspective, in your view?
- Okay, well, (chuckles)
my son's trying to break
into my little room right now.
But with that said, so I'm
chuckling a little bit.
But with that said, you right,
we're at this 20 day moving average is
where we broke down a little bit
and the technicals have
played pretty heavily
in the marketplace recently.
Now, if I look at the S&P 500 index,
I see a little bit of
chop going on down here.
This is on the low end
of it, or right around.
(laughs loudly)
One second, I'll be right there.
Okay, so--
- We can have a third cohost
this Monday morning. (laughs loudly)
- Yeah, well, it gives me a little smile.
All right, mom's got him.
We're at 2776 is where it's
kinda started that channel
and then up to the
upside were around 2950.
So we see the little bit
of chop that we've had
over the last few days,
going back to the 21st,
and right now, we're trying
to break out to the upside.
So if we did get a little bit of a break
out of this channel, I think overall,
obviously, that'd be good
news, the day's early,
so we don't quite know where
we're gonna finish up yet.
But then the 200 day
average comes into play.
Now, obviously, a good
sign for the markets
and it's always a good sign to
be above the moving averages.
And if we can get to the point where above
that 200 day moving average,
I think overall that
that's gonna give, even still
down the markets a little bit,
I would expect the VIX index
to come in a little bit,
get down into 20 range, give
us just a little bit less fear
in the marketplace, if
we can start trading
above all of these moving
averages in the short term.
All right, so let's talk about Walmart.
Here's the Walmart chart
right here and I know
they're gonna be announcing
earnings in the morning.
What are your thoughts
on Walmart, Lindsey?
- Yeah, so they report
earnings tomorrow morning.
This is, like I started to say,
Walmart has been one of those companies
that's been a beneficiary
of the changing world
in the aftermath of the COVID crisis,
a lot more people shopping
online and people looking
for their low price
promise that they offer,
and their stores have
been able to remain open,
unlike a department store,
where many of them closed all
their stores, had to fire
some of their employees.
Walmart was on the opposite side of that.
So they've been actually been benefiting
and helping consumers
throughout this process
and their stock reflects that.
So you look at the chart, I
will say, we've seen a bit
of a dip there since the
end of April into May.
But still the stock is up
7% on a year to date basis,
that compares to the S&P
500, which is down 11%.
The staple sector, which is
as a stock that is part of,
it's not part of consumer discretionary,
it's part of consumer staples,
because they sell a lot
of staples and over 50%
of their revenue comes
from groceries actually.
So the staple sector is down 9%.
So these guys are doing really well.
Now, you compare that to Amazon,
who are competing fiercely with for
that eCommerce business right now,
especially in the grocery
space or essential space,
essential product space, Amazon's up 31%.
But I think the more recent weakness
at the end of April going into May,
was driven by Amazon's earnings reports.
Amazon recorded at the
end of April, April 30th,
after the close, so may 1st
their stock actually took a dip
and I think Walmart stock kind
of reacted to that as well.
So setting a little bit
of a lower base going
into the earnings report
tomorrow, which is good,
but it's gonna be all about
as usual, same store sales.
In the US, especially, we
call those cops store sales
in the retail industry,
they're expected to be up nine
to 10% for the most recent quarter,
which is a big acceleration
from what they had seen
over the course of the last year plus,
and that is due to the selling of those
in demand items over
the last couple months.
But I think what's
gonna be more important,
less so what happened in the last quarter,
but what's happening quarter
to date for the new quarter.
And I think investors are
looking for same store sales,
tab moderated a little bit in
the course of the past month
or so since the second
quarter started here.
So maybe those of us same
store sales numbers come down
to a five, 6% mid single
digit range, which is fine,
but eCommerce, if they'll talk about that,
that's gonna be really interesting to hear
where that's at quarter to date,
I think the expectation is still
that those numbers are gonna
be up huge, like 50 to 75%
on that quarter to date basis,
and then most importantly,
is gonna be where are these guys at
from an expense perspective,
because we heard from Amazon,
they've seen expenses
increased pretty significantly
while they prepare their business
to deal with the COVID crisis.
So making sure that their
employees are able to safely,
socially distance from each other,
making sure that the
warehouses are set up for that,
making sure there's masks
and other PPE equipment for their workers,
really taking into consideration
the safety of the worker.
Walmart's private and I see a
lot of those similar expenses.
Amazon saw an increase
in expenses for shipping,
as demand increase, it was
really hard for them to keep
their two day delivery promise,
on especially a lot of these
items, like toilet paper,
Clorox wipes, different cleaning products,
and things like that, you know,
the supply chain was
really constrained there.
So it was like Amazon wasn't
getting the stuff quick enough
to send it out to keep that promise.
You might hear some of
that also from Walmart,
people expect that, but the question is,
where your EBIT, earnings before interest
and taxes margins and your gross margins,
going in the second half of the year?
You got to deal with this crisis
in the first half of the year.
Can we see an improvement
in the second half?
So I think that's really
where investors are going
to be squarely focus when
they report earnings tomorrow.
Like I said, the stock base
here is a little bit lower going
into the earnings report, unlike Amazon,
who I think hit potentially
a new all time high,
going into their earnings
reports as a little bit better
of a setup, doesn't mean there
might not be any pressure
cause this is an expensive stock, Brian,
trading at 25 times on a forward price
to earnings ratio basis,
that compares to 21 times
for the three year average,
and 18 and a half times
for the five year average.
So for a retailer, this
is pretty expensive.
So we'll see how investors react to it.
It's still pretty high
quality company too,
again, though, Brian, before I let you get
into your options trade for the day,
I just wanna remind our
viewers of a couple things.
Number one, these are not
meant to be recommendations
to stocks that we talk
about, really just kind
of paper trades ideas
to get your mind going,
not a recommendation though
by us and for the record,
I do own Amazon stock,
I do not own Walmart.
Brian, I don't know about you,
you can give that disclosure.
And then finally, if
you have any questions,
we've got some new technology today.
So we're able to take
your questions live today.
So please type them in the box,
in the comment box on the right,
and we'll get to them
at the end of the show.
So Brian--
- All right.
- I'm gonna pass it back to you.
- Excellent, thank you so much, Lindsey.
I do not happen to own Walmart also,
I'll put that in the record.
But right here, I'm gonna start
by just looking at the chart.
One of the things that's good
about the chart is we did fill a gap.
Filling gaps are always good in
as far as technical analysis is concerned.
So we haven't quite got
back up over that level,
and it'd be interesting if
that actually happened today
before the earnings, if that did happen,
that would be a good sign,
just overall chart wise for Walmart.
All right, and so now we get
into the options position here,
we're looking at Walmart stocks,
and were up $1.19 on the day today,
earnings date is tomorrow,
it's gonna be before they open.
And we're looking at a long call spread,
and it's gonna be speculative,
mainly because earnings,
so if you're doing any
option trade around earnings,
I would term it as a speculative trade.
Now, this is just a paper
trade that we'll be looking at,
not meant to be recommendation,
as Lindsey mentioned.
So we're looking at the 127.15,
right now that's where
the current price is at.
Now, with Walmart,
we have a plethora of
different explorations,
and if I'm looking at an earnings trade
or anything around
earnings, I don't even care
what that specific strategy is,
I always wanting to know
what the expected move is.
So the expected move would be by looking
at the near term option
contract for a day options.
All you're doing is trying to see
what the marketplace is saying
about Walmart going into earnings.
And if you see here, we
see the implied volatility.
Here's the call option,
this is the Ally invest
live option chains.
We see the 127 strike is the
most at the money strike.
We've seen implied
volatilities at around 58%.
So they're elevated
relative to even go out
to the expiration that
we're gonna use today,
the 18 day, June 5th, expiration,
that's saying implied
volatility's about 34%.
So the marketplace knows
about this earnings report,
that's why we see that
inflated volatility.
So now what else can I figure out
by looking at that expiration?
127 is the strike, we see that the most
at the money call option,
right here the 127 strike,
is trading about 3.30 on the
ask, so we'll call around 3.25,
over here on the bid side,
on puts side, I'm sorry,
we're seeing it's 3.10 on the
ask, about 3.00 on the bid.
So we'll call about $6 and 20 cents,
and if we do the math on
that, that's about a 6% move
in Walmart after earnings in the house.
That's what the marketplace
is expecting, right?
That's the line in the
center, that's you're run,
it has no regard to direction.
But we just want to make sure
that if we're doing a trade
that we're selling a
strike that is anticipated
that the stock could actually
move that amount, all right?
So that'll make sense.
Let's go back into a long call spread,
and the trade that we'll look
at is the June 5th expiration.
So we're gonna give this,
this trade's gonna be
also speculative trade,
this is going to have 18 days to live.
It mean, the thing that
makes it more speculative
on a paper trading basis is the fact
that they are announcing in the morning,
and so we don't know what's gonna happen
after that big announcement.
We know what the expected move is.
They're thinking about a six
point move in new direction,
that'd be down to 121 in the bear side,
on the upside, we're looking at 133.
So we wanna pick strikes
that are contained within that move.
And all that is, when I'm
looking at that expected move,
I like to call that kinda the over under
what the marketplace is saying.
And they're saying that
if you just buy a one put
and a long call at the
most at the money strike,
this is what we're gonna
charge you for that,
that's the cost of that.
So that basically means that is
what the marketplace is
expecting could happen.
That's why we're charging
that premium overall.
All right, so 125 strike,
June 5th expiration,
if I click here, once will mean
to buy on our option chains,
if I click here twice would mean to sell,
and if I go down to our workbench,
we see that we're basically
doing a 50 50 trade here
and that is a five point
wide spread from 125 to 130.
And we're gonna pay at the
midpoint, it says 2.53.
I'm gonna make the math simple.
Our goal would be to fill
somewhere near the midpoint,
we're gonna say 2.50.
If we could get a $2
and 50 cent fill here,
that's literally a 50 50 trade,
and that if it circles up above 130,
you're gonna make 2.50, which
is five minus $2 and 50 cents,
if it goes below 125,
you're gonna lose that 2.50.
If that happens after the earnings,
we still have a few
days for it bounce back,
but in concept if it at
expiration is below 125,
that means we'd be down
there $2 and 50 cents.
Now, this is a one by one long spread,
that's what it would be
inside the options playbook.
A one by one long spread, that means
that you take that $2 and 50
cents, you multiply it by 100,
what the contracts represent,
and it would be $250 for
each spread that you put on.
And don't forget
commissions, you always want
to include commission's
on that valuation too.
So $250 worth of risk.
If the market goes up and
closes above 130 at expiration,
that'll give us $2 and
50 cents worth of upside,
less commissions on that trade.
So that's our official paper trade.
So I'm gonna click the trade button here
and I'm just gonna put
it in the right rail,
we're not gonna send this order,
and I'll put $2 and 50 cents right here
in the net debit to the account here.
So doing a long spread, the
reason why we want to sell
some premium is cause we have earnings,
and implied volatilities are elevated
because of the earnings
are not as high as back
when the big drop in the
marketplace just overall
on the VIX skyrocketed to
above 80% implied volatility,
but they are still high relative
to last year's valuation.
So because of that, we want
to buy one option contract
and sell one option
contract at the same time.
All right, so that's the official
paper trade we're looking
to buy one of the June
5th expiration 125 calls
and at the same time,
sell one of the June 5th
expiration 130 calls.
Our goal would be to fill
somewhere near the midpoint,
I never guarantee that you'd
get your mid point filled,
but that would be our goal,
and that price is $2 and 50 cents.
Don't forget to add the
commission's on the trade.
And then let's look quickly
at the profit and loss graph here,
let me get my screen zoomed in.
So let me get rid of the
right rail for short term.
All right, so if I zoom in
on our profit and loss graph,
we see here's where our risk is.
Basically, when I look
at a long call spread,
I kinda think of, well, from 130 out up,
I cannot profit anymore, I'm capped.
So I'm gonna take my ball and go home.
But 125 on down, I cannot lose anymore
cause our risk is fixed.
So from 125 on down, the
maximum we could lose is
that $2 and 50 cents or
$250 plus commission.
And so from 125 on down, I'm
gonna take my ball and go home.
The only way that I'm playing
is between 125 and 130.
That's the range of stock prices
where this strategy is in play.
Now to start with, we're
looking at the multicolored line
this is the multicolored line.
This is our profit and
loss graph as of right now.
It's a fairly flat line because
volatilities are kinda high,
and we got a very short term expiration.
But if I change the days to expiration,
let's go down and change it,
I'll do it to three days,
and we'll see that line start
to gravitate towards the dotted line,
which is the expiration graph.
So when you're doing this
strategy, you're better off
if the stock makes that 130 strike,
the high strike that we sold,
closer to the expiration date,
as opposed to right away.
And that's the difference
between buying a call outright,
as opposed to doing a long call spread.
Now, if the stock continues on up,
you see that the green
line eventually just moves
into the white expiration graph.
So obviously, as the stock
skyrockets, that's your best bet.
It's also the true on
the downside to here that
it gives you a small pillow
to land on if it's incorrect,
and then as you go further down and more
towards that exploration wrap.
All right, so let's now
open it up for questions.
We had a question
from last week, Lindsey?
- Yeah.
- And let me caption on my screen here.
- Yeah, we had a really good question.
- Why don't we start with that?
Yep.
- Yeah, it was a pretty detailed question.
And so it came from David D.
I'm gonna distill it down
because it was very detailed
and it included specific
prices and everything.
So it was regarding our trade last week,
our paper trade on Square.
David D.,
from what I can tell,
what he's really interested in knowing is,
can you explain what selling
a short put spread is,
and then how do you profit from it?
- All right, okay, so last
week, we looked at Square,
and we sold a short put spread,
that meant that we wanted the market
to either stay where it was at or go up.
Now, the biggest thing about options,
which is sometimes tricky is that
you can sell an option without owning it
when you're selling an option contracts.
So when you do that is in
theory, what you really want is
for the option contracts
to expire worthless.
And that's why we say that
you're neutral to bullish.
If I'm selling a put, I'm bullish,
if I'm buying a put, I'm bearish.
So in this instance,
that underlying stock,
it did bounce up and
down, but after we talked
about the call, it made
a fairly decent run up.
So you got two different
things that you can do here,
you can either buy in close the short put,
and sell and close that long put,
and then you're gonna pay
a small debit to get out of
that trade after the stock ran up.
Or you can wait all the way to expiration,
and you hope that those
contracts expire worthless,
hence, you would make the
net credit that you received
when you initially put on the spread.
So when I'm selling
something for a net credit,
like in a short call spread
or a short put spread,
like we talked about in square last week,
if you think about it this way,
if you sell something very rarely do
you get more for it, right?
If you go in, and you sell
a car to your neighbor,
very rarely do they drive that
car around the neighborhood
and say, "This is such a great car, here,
"let me give you more money for it."
That's also true in the options world.
When you sell something, 99% of the time,
that means that's your maximum that
you're gonna get on that trade.
You bring in that net credit,
you hope the options expire worthless,
and then that means you make the maximum
from that short put spread.
All right, well, that's gonna be it
for this edition of the
Stock Play of the Day.
If you have any questions, and
you put them in the chat box,
we will address them next week.
So make sure that you do that.
And don't forget to click
subscribe and ring the bell,
so you get all notifications
for all Stock Plays of the Day.
And I'll be back on Friday to talk
about the Stock Play of
the Day Overtime Edition.
- Yeah, and the stock play,
the overtime, you can't miss it
cause Brian's gonna
revisit this paper trade
on Walmart on Friday to
give you an update of
if there needs to be any
rejiggering to the trade
or if you're good to go until expiration.
So it's a really great, quick
hit show on Fridays at noon,
right, Brian?
- That is correct.
And I think we came up
with a word of the day,
rejiggering is now the word of the day.
So I do think that--
- Awesome.
- We're gonna address that next week.
Thanks for that, Lindsey.
All right, everyone.
Thanks for coming.
We'll see you same time,
same place next week.
