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Wal-Mart (WMT)

January 08, 2009

Dear Fellow Options Traders,

Wal-Mart Stores (WMT) announced disappointing earnings and guidance this morning, which has knocked the stock down about 8% today. When you look at the stock during the past year and decade, the high $40 range appears to be the low-end of the stock trading range, which is bounded on the up side at about $65 per share.

In the fiscal year ending January 2006, WMT had earnings per share of $2.71. The following year, earnings rose to $2.93. Currently, earnings are expected to be north of $3 and rise through the January 2010.

In one of the worst consumer spending environments in memory, WMT reported positive comparable store sales in December and sees January comps as flat to up 2%.

With the company not falling apart and with the dramatic stock action today, we believe this is an excellent time to collect option premium. We recommend selling the WMT Feb 47.50 Puts (WMTNW) for $1.45 or more.

This is a bullish trade and we expect to buy the puts back to close at a discount before February expirations to secure our profits. However, if we end up owning WMT at $47.50 (less the $1.45, or for $46.05), we believe this is an attractive entry point into the stock.

With the earnings announcement today, options trading volume on WMT is at three-times normal levels. Much of this flow is consistent with our recommendation.

Have a great day trading.


Nick Atkeson and Andrew Houghton
Editors
Options Trader