For those who are seeking a relative scalp — within the next four weeks — Walmart (NYSE: WMT) should be one of the names to consider. As a big-box retailer with an indelible footprint in the economy, WMT stock is often considered a no-brainer for a long-term portfolio. But the beauty here is that the inherent stability of the ticker also offers a catalyst for short-term speculation when the conditions are ripe.
My argument? The conditions for bullishly betting on WMT stock appear ripe right now.
No, I’m not going to waste your time going over all the past metrics that every other financial publication has discussed ad nauseum. As you know, once important information becomes public, that news is instantaneously digested by the top institutions and hedge funds. You as a retail trader will never win the latency game.
It doesn’t matter what Bob from Arkansas thinks about the price/earnings ratio, the revenue growth, the free cash flow yield or any number of financial metrics. If there was an edge that Walmart’s Form 10-Q offered, just save yourself the heartache with the realization that this edge has already been priced in.
As I said before, we cannot win the information latency game and that goes especially for WMT stock, one of the world’s most heavily traded tickers. Instead, we must rely on the structural footprints that such securities leave behind.
Our job isn’t to determine or predict where Walmart stock may end up at a given point in time. Instead, the theory is that different market triggers cause changes to how WMT typically responds. By identifying the trigger and studying the historical response, we gain a better idea of where the ticker may end up — not because we think so but because we observe the data.
From my analysis, the trigger is that WMT stock has structurally suffered an extended downturn. Since May 19, Walmart is down nearly 15%. With such a steep loss, there’s a strong possibility that rules-based trading algorithms may view the security as a discount.
Focusing on the Machines, Not the People Behind WMT Stock
This is where the fundamental stability of Walmart stock comes into play. Unlike flash-in-the-pan securities which are subject to constantly shifting sentiment regimes, the narrative for WMT is straightforward: everyday low prices, baby!
Is it a silly thing to say? Perhaps but here’s the deal: Walmart often is the low-cost leader for the products that consumers want and need. Whether you’re talking groceries or video games, Walmart practically stocks it all. So while there are sentiment regimes that can impact WMT stock, the movement is relatively limited as the core business model is incredibly durable.
What does that mean for the quant trader? It means that they have greater confidence in isolating triggers or signals to exploit structural footprints. Since any sentiment regimes are statistically likely to be limited, traders may theoretically be able to stick their necks out more.
And what exactly is this trigger for WMT stock? In the past 10 weeks, WMT stock has printed only four up weeks, leading to a downward slope. This 4-6-D signal has remarkably only materialized 28 times on a rolling basis since January 2019. You’d think that for such a popular security, this sample size would be greater but no, it’s only 28 occurrences.
What’s more interesting is what happens after this signal flashes. Over the next 10 weeks, the forward distribution would be expected to land between $112.50 and $122.50 (assuming a starting price of $114.24), with probability density peaking around $118.50. It’s a slightly better performance than the random baseline, where WMT stock would be expected to range between $112 and $122, with probability density peaking at $117.50.
However, the real highlight is that the performance variance between the signal and the random baseline is not orderly and linear. Specifically, week 4 following the flashing of the 4-6-D signal leads to a median bump of roughly 2.9%. That would mean that WMT stock, if prior patterns were to hold true, is likely to reach around $117.50 on week 4.
By knowing that, we can better plan our options trading strategy.
Targeting a Specific Trade for Walmart Stock
Based on the inductive evidence above, I believe a compelling case can be made for the 116/118 bull call spread expiring Aug. 14 (which is the equivalent of week 4 in the model above). Traders will be hoping for Walmart stock to rise through the $118 strike at expiration to trigger the maximum payout, which stands at over 106%. Further, the net debit is reasonable (given the thinness of the spread) at only $97 per spread.
Generally speaking, traders who seek a higher probability of success go for wider wings (or the difference between the legs of the options spread). This action creates a broader range for the target security to hit, thereby providing a more forgiving breakeven price. Of course, every move has a catch. Here, traders must pay a more expensive premium for the increased margin of safety.
Now, for the 116/118 bull spread, the breakeven price clocks in at $116.97, which is quite high. As a result, the market assigns a low probability of breaking even at only 36.9%. However, this calculation is theoretical. Stemming from the Black-Scholes formula — which assumes a risk-neutral, lognormal environment — the 36.9% probability represents the distance (in standard deviations) between the current spot price and the target price.
In other words, if Black-Scholes best represented reality, the 116/118 spread has less than a 40% chance of breaking even. However, I don’t believe that to be the case. Because WMT stock printed a rare quantitative signal, it has been proven more likely that the ticker may positively mean revert.
Specifically, of the 28 times that the aforementioned signal flashed, Walmart stock has exceeded the equivalent of the $116.97 breakeven price a total of 15 times at the end of week 4. As such, the probability of profit could actually be 53.6% on a conditional and observational framework. That’s 1,670 basis points of “free odds,” which is why I’m excited about WMT stock.
You’re just not going to see too many instances of such wide probability variances for a stable powerhouse like Walmart. I want to be clear that this doesn’t necessarily make WMT stock a guaranteed win. Still, if you’re of the speculating type, I would argue that the big-box retailer makes a statistically compelling case for itself.
