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Wal-Mart Option Players Are Wary Ahead of Earnings


Pre-earnings put trading has hit fever pitch on Wal-Mart.

Despite advancing roughly 24% in 2012 -- and touching a record high last month -- option speculators remain skeptical of Wal-Mart (WMT). During the past two weeks, traders on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) have bought to open more than two Wal-Mart puts for every call. In fact, the security's 10-day put/call volume ratio of 2.49 sits just five percentage points from a 12-month peak, suggesting option buyers have initiated bearish bets over bullish at a near annual-high clip recently.

As a result, the blue chip's Schaeffer's put/call open interest ratio (SOIR) has ascended to 2.77, implying that puts nearly triple their call counterparts among the front three months of options. What's more, this ratio ranks higher than all others of the past year, indicating that near-term options traders haven't been more put-skewed during the past 52 weeks.

In today's trading, however, it looks like some speculators may be employing puts to place neutral-to-bullish bets on Wal-Mart Specifically, the August 72.50 put has seen more than 2,800 contracts change hands -- mostly at the bid price, suggesting they were sold. Considering the puts are out of the money, and since implied volatility on the front-month strike was last seen higher, there's a good chance that a healthy portion of the action consists of sell-to-open activity. By writing the 72.50-strike puts to open, the sellers are expecting Wal-Mart to remain north of $72.50 through the end of the week -- which encompasses the company's turn in the earnings limelight tomorrow. In this best-case scenario, the puts will expire worthless, and the sellers can retain the entire premium received at initiation.

Should Wal-Mart report stronger-than-expected earnings, an unwinding of the lingering pessimism in the options pits could translate into a contrarian tailwind for the stock. In the same vein, a flood of upbeat analyst attention could also amplify any post-earnings momentum. Currently, not even half of the analysts following the outperformer consider it worthy of a "buy" or better endorsement. Likewise, the consensus 12-month price target on the equity rests at a meager $72.65, representing a discount to Wal-Mart's closing price of $74.01 on Tuesday, and leaving the door wide open for price-target boosts.

Technically speaking, Wal-Mart has added 0.4% so far today, and was last seen flirting with the $74.29 level. From a slightly longer-term perspective, the security is relatively flat for the month, but its uptrending 10-day and 20-day moving average -- which have served as support since mid-May -- could launch the stock on its next leg higher.

This article by A was originally published on Schaeffer's Investment Research.

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