Shocking headline du jour: Amazon.com, Inc. (NASDAQ:AMZN) just bought Whole Foods Market, Inc. (NASDAQ:WFM). And while news likely this typically creates positive pin action for the sector, given the particulars of this case, that’s not happening. Wal-Mart Stores Inc (NYSE:WMT) is off 7% on the news, sending WMT stock to a pivotal point — one where we can trade it for easy profits.
Source: Mike Mozart via Flickr
See, investors recognize Amazon as a fierce competitor, and they’ve quickly extrapolated today’s deal into what will happen to the sector. I don’t blame them. We’ve seen what happened to the brick-and-mortar retailers like Macy’s Inc (NYSE:M).
WMT stock is off big today, and while I agree that it will have to contend with Amazon’s red-carpet entry into its arena, I don’t believe this to be the beginning of the end. Not close. It won’t go the way of Macy’s, or even the way of Target Corporation (NYSE:TGT) and its slow but obvious decline.
There will be an adjustment period, but Walmart management has had to fend off many other threats.
This does, however, shave off the premium that WMT shares had enjoyed. So today, I’m not going to buy Walmart stock and hope for a rebound (and consequent rally). Instead, I’m going to generate income from the fears that the Amazon-Whole Foods gorilla brought today.
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Technically, today’s dip places WMT stock into a prior pivot area. Recently, $73 had served as a breakout point, so bulls and bears are likely to duke it out once again, and neither will let it go without a decent fight. If $73 fails, I see the same battle repeating over $69 and $66 if price is unable to stabilize on this dip.
The fundamental story for Walmart is still solid, even after this headline. So I am willing to take a risk on the long side. I will sell downside risk to take advantage of the high volatility that this drop has caused.
How to Trade WMT Stock
The bet: Sell the Jan 2018 $60 puts and collect $1 per contract. This is a bullish trade that needs Walmart to stay above the strike price to win. With a 19% buffer, we have a 90% theoretical chance of that happening. But if price falls below our strike, then we’ll own the shares and could suffer losses below $59.
Selling naked puts is not suited for all investors. For those with milder risk appetites, we can use spreads in WMT stock instead.
The alternate: Sell the Jan 2018 $62.50/$60 credit put spread, where I have about the same chances of success but with limited risk. Yet if successful, the spread will still yield 13%. The comparison I’d like to make is that to match this spread, you’d have to try to buy Walmart shares outright, with no room for error, then hope it rallies 13% on its own.
Selling options is risky business. Never risk more than you can afford to lose.
Learn how to generate income from options here. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernic and stocktwits at @racernic.
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