Walmart (WMT) Option Traders Betting on a Turnaround

Investors have recently bid down the share prices of Walmart Inc. (WMT) after the company reported earnings last month. The company's stock could also be suffering from recent volatility in equity markets, which has been amplified by ongoing fears of the omicron variant of COVID-19. Furthermore, inflation and a rising dollar could make the discount retailer a less attractive investment as rising costs could cut into its bottom line.

Option traders appear to see value in Walmart stock, as they appear to be positioned for the share price to rise in the near term. As a top holding in State Street's Consumer Staples Sector ETF (XLP), Walmart stock could be viewed by option traders as standing to benefit from rising inflation, where investors could seek the relative safer ground of established large-cap stocks, especially in sectors that tend to perform better during times of inflation that others.

Consider that the open interest for Walmart favors calls over puts, and the implied volatility built into those prices suggests that traders are buying puts and selling calls.

Chart watchers can gain valuable insight into the overall sentiment toward Walmart stock by combining technical analysis of share price activity with assessment of recent option activity. The chart below illustrates the recent action for the Walmart share price as of Tuesday, Dec. 21.

Chart Analysis

This chart depicts the price action of Walmart over the course of the last three months. Each candle represents one trading day. The blue lines are a historical volatility range formed by 20-day Keltner Channel indicators, which depicts price levels that represent a multiple of the average true range (ATR) for Walmart stock. ATR is a standard tool for illustrating historical volatility over time. Over the course of the past month, the outer bands of the historical volatility range have been widening. This implies that it has been difficult for traders to agree on a fair value of Walmart stock over this time period.

From the left-hand side of the chart, Walmart stock was in a firm downward trend until the beginning of October, illustrated by the red arrow. This helps to highlight the way that Walmart stock traded consistently below its 20-day moving average, before finally falling to an extreme low of the volatility range.

This extreme low then marked a turnaround point for Walmart, as the stock then rallied for the next month, highlighted by the green arrow. During this time, Walmart stock rose above its 20-day moving average and closed at an extreme high of the volatility range, just below all-time highs for Walmart stock.

This point also marked the beginning of the most recent downward trend. Despite brief periods of upward momentum, Walmart stock has recently been establishing both lower highs and lower lows. The Walmart share price is in a wide downward channel, highlighted in blue. During this time, the volatility bands have expanded the most.

In the past month, the highest Walmart share price was $147.88 in late November, highlighted by the green balloon. Conversely, the lowest share price during this time was $135.24 just a few days later, in early December, highlighted by the red balloon.

During this time period, the Walmart share price has fallen 3.5%. For comparison's sake, State Street's S&P 500 Index ETF (SPY), which could be a barometer for the health of the market as a whole, fell 0.96%. Walmart has likewise underperformed XLP, which has risen 2.7% in the past month. Walmart accounts for 9% of the total holdings of XLP.

Option Analysis

Recent trading volumes of Walmart options greatly favor calls over puts. On Tuesday, Dec. 21, over 40,000 calls were traded compared to more than 14,000 puts. This is a nearly 3-to-1 ratio, which, at first glance, is heavily bullish. However, trading volumes alone only tell one part of the story.

An analysis of a stock's open interest can provide greater context into the sentiment of option traders. The current open interest for Walmart features 441,000 calls against 266,000 puts. While recent trading volumes are incredibly bullish, these open interest figures illustrate a more moderate view of Walmart's share price from option traders. However, much like trading volumes, open interest figures require further analysis to provide deeper insights into option trader sentiment.

For Jan. 21, the next monthly option expiration date, the single option with the highest open interest is the $150 call option, with 26,400. This represents a 7% upside to the current share price of Walmart stock. In addition, calls outnumber puts in the open interest for this expiration date nearly 2-to-1.

A key measure for option trader sentiment in open interest is implied volatility. For options expiring Dec. 23, implied volatility suggests that traders are selling puts and buying calls. That's because, for put options, the open interest is rising while implied volatility is falling, suggesting that traders are selling more contracts on short positions in the option. Conversely, for call options, open interest is rising while implied volatility is also rising, indicating that traders are adding to long positions in the option.

Considering at-the-money options and one strike in either direction up or down in the option chain, there are a nearly even number of calls and puts. This is important to consider, as these strikes perhaps reflect more realistic price action based on current share prices rather than far out-of-the-money options, which may have numbers skewed by speculators and option sellers collecting premium.

While call options may have a higher presence in the Walmart open interest, option open interest as whole is noticeably down. Over the past five days, total open interest has decreased by 19%. Based on the 52-week average of Walmart open interest, Walmart had a higher open interest 87% of the days in the last year. This indicates that there is not as much demand to trade and carry positions in Walmart.

Macro Factors

Markets have experienced recent prolonged volatility due to several factors. While investors may be fearful of the long-term effects of the omicron variant of COVID-19, the specter of inflation cannot be ignored. According to the most recent consumer price index numbers, inflation accelerated at its fastest pace since 1982 in November.

To combat inflation, the Federal Reserve has recently shifted to a more hawkish stance. The central bank recently outlined its plan to accelerate its tapering of monthly bond asset purchases. The Fed also predicted that, to further mitigate inflation, it plans to raise interest rates perhaps up to three times in 2022.

The mention of planned interest rate hikes has recently roiled markets, as investors look to relative safer havens to park their money. As inflation saps the buying power of the dollar for consumers, investors move their money to sectors that are less speculative and perhaps considered more necessary.

Sectors that many consider relative "safe havens" during inflation include utilities, real estate, financials, and consumer staples. Walmart is considered one of the largest stocks in the consumer staples sector. The chart below compares the recent performance of Walmart stock with the U.S. Dollar Index (DXY), State Street's Consumer Staples Sector ETF (XLP), and The Procter and Gamble Company (PG), which is the largest holding of XLP.

It's notable that, as DXY has risen, and inflation fears have grown, Procter & Gamble and XLP have risen as well. Conversely, Walmart is lagging each of these equities. Option traders could be betting that the current downward trend of Walmart stock reverses and effectively "catches up" with its sector as investors continue to seek safer ground.

These support and resistance levels show a large range of support and resistance for prices. As a result, it is possible that any news, surprisingly bad or good, will catch investors by surprise and could generate an unusually large move. After the previous earnings announcement, Walmart shares fell by 1.5% in the day following and continued to fall the following week, settling below the 20-day moving average for several weeks. Investors may not be expecting the same kind of move in the price after this announcement. With plenty of room in the volatility range, share prices could rise or fall more than expected.

Market Impact

Over the past month, the Walmart has shed 3.5%, as investors continue to exhibit fear toward inflation and uncertainty toward the omicron variant of COVID-19. Option traders appear to be positioning themselves for Walmart's recent downward trend to reverse, as open interest suggests that a larger number of option traders are buying calls than puts. As investors continue to rotate into defensive sectors to avoid inflation fallout, option traders could see upside for the Walmart share price from this point.