OPTIONS TALK: WalMart Testing Support
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June 29, 2007
In recent weeks the US market has shown signs of increasing volatility. It seems that each time the market wants to move up it gets forcefully sold off. It is very frustrating for directional traders when the overall trend shows signs of uncertainty. In times like this it is best to stay out of the market or look to the long term.
WMTChart 1 shows a weekly chart with some interesting points of analysis. The prices of $9.55 on Jan 18th 1996 and $70.25 on Dec 31st 1999, gives a price range of $60.70. 50% of this range comes in at $39.90. WMT has held a support level of $42.31 for the past eight years, which is above the 50% range support. This is a bullish sign. A long term ABC pattern has been established with a potential price target at the old top of $70.25. This is also close to the 50% milestone of $72.66 and could be a realistic price target for WMT over the next year.
Chart 1 – WMT Weekly Bar Chart
Chart 2 highlights an interesting pattern on the daily bar chart of WMT. A trend line has been drawn from 1 to 2. This line has been copied and placed on either side of the original trend line as shown in chart 2. It can clearly be seen that WMT’s angle of motion is similar in all cases. This is evident from all of the touches off the trend lines. The current trend line is about to be retested and could act as a buying opportunity if the right setup occurs. The great thing about options trading is that money can be made even if the stock breaks below the trend line and continues lower.
Chart 2 – WMT Daily Bar Chart
A Call Ratio Backspread would be a great choice to take advantage of such a potential move. When placed for a credit, Ratio Backspreads can make money if the stock goes up or down. I consider these trades to be a hedging play because if the stock moves against the intended direction, a small profit is made and no loss is taken. Much better than a buy and hold strategy.
Chart 3 illustrates a Call Ratio Backspread using Jan09 50 and 55 Call options. It can be placed for a $140 credit using a 3-to-2 ratio. The risk figures shown model the trade with 143 days to expiry. The price has been set to $55, which is the point of maximum loss. It can be seen that a small loss of approximately $290 could be realised if WMT was trading at this price in 429 days. This is the worst case scenario. However, if the price target of around $70 was achieved a nice profit of approximately $800 will be made. A pretty good trade with minimal risk.
Chart 3 – WMT Risk Graph
Ratio Backspreads are a great way to setup long-term trades without the worry of taking big losses. Even if the trade goes completely wrong you can make some money. And if it really goes your way you can make a lot of money.
Manage Your Risk!
Oscar Lee
Trading Tutors
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