Walmart's Pullback to 'Important Marker' Offers Options Opportunity

Adding to Walmart

As a buyer of options, I am normally looking for some sort of base that lasts say 4-6 weeks in duration, with a very tight range of 3% or less the price of the stock. This is somewhat required as it allows us to choose a good strike at a solid low-risk entry point.

Since options are defined risk (you only lose what you put into it), this low-risk entry also defines the point where you might be wrong.

However, a stock that hits a certain level of support that has normally been a good bounce point is also a good opportunity. Take Walmart (WMT) , which recent tagged new all-time highs in February but has backed off considerably. In fact, Walmart stock has retreated about 8%, a normal-sized pullback for this name after reaching an overbought condition. See the previous pullbacks for examples, one being shorter than the rest.

The interesting thing on these pullbacks was that Walmart stopped going down when it hit the 50-day moving average (purple line) or close to it. That now becomes an important marker, because the stock started to go higher after each touch/near touch. This last move down has this classic characteristic.

So, if we believe Walmart's drop ends here we could look to a May or June call to give us some time for the stock to move upward. Our objective might be the old high at $134, but if the pattern since last summer holds we may be talking $145-150. On the conservative side, the June $125 call at 7.75 offers some good gains if this stock moves higher towards the price target.

The premium is all time decay so we have no value but more than three months to let this occur. Remember, defined risk, and with the option only selling for 6.2% of the stock price and an earnings report due out in May, this one looks right.