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A Bearish Spread on Wal-Mart Stores (WMT)

Published on December 27, 2011

A Bearish Spread on Wal-Mart Stores (WMT)

December 27, 2011

Wal-Mart Stores (WMT) recently hit a 52wk high and technically it seems to be breaking out from a psychological price point at $60. But based on what I see, I see a fake breakout and it might soon find a resistance to pull back, at least for short term.

Volume has been declining, I also see RSI divergence and MACD isn’t very encouraging too. However, pls do take note that we are in one of the most bullish periods from calendar trading perspective and hence WMT may continue it’s upward march together with broader markets. So, pls take this trade with a pinch of salt (may be more) and be on the look out for any significant increase in volume.

I would like to reduce the risk, while still maximize gains. So, here is a specific trade I am looking at (it is called a bear put vertical debit spread) –

  • Buy to Open WMT Feb 60 Put
  • Sell to Open WMT Feb 57.5 put
  • Total Debit is roughly +/- $78

Here is how the Risk/reward curve look like-

The maximum gains from this trade is $172 for every $78 investment assuming WMT remains below 57.5 by Feb expiration. However, I am not expecting the trade to be there for that long. I plan to exit the trade either for a +50% gains or -30%  Stoploss.

Let’s say for some reasons we don’t hit the targets as mentioned above but if WMT rises about $61.5, we’ll be out of the trade and if it drops to $58.5, we’ll be out as well. The targets above are just for guidance.

Disclaimer– As of this writing I don’t have this trade but I might place orders anytime.

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