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Wal-Mart Traders Eye Uncharted Territory

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WMT's June 77.50 calls were in high demand on Monday.

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Shares of Wal-Mart Stores, Inc. (NYSE:WMT) came within a chip shot of their record high yesterday. This positive price action prompted one group of investors to scoop up the stock's June 77.50 calls, betting on a trek into uncharted territory for the blue chip. Of the 4,797 contracts traded at this near-the-money call, 90% changed hands at the ask price, implied volatility ticked higher, and open interest added 4,225 positions overnight. Summing it all up, it appears a number of these contracts were bought to open.

By purchasing the calls, traders expect WMT to rise above the $77.50 mark by June options expiration. More specifically, the volume-weighted average price (VWAP) for the calls was $1.35, making breakeven $78.85 (strike price plus the VWAP). At last night's close, delta for the call was perched at 0.47, or 47%, suggesting a roughly 1-in-2 chance the option will land in profitable territory over the next 11 weeks. Should Wal-Mart fail to topple the strike price, the most yesterday's call buyers stand to lose is the initial premium paid.

Widening the sentiment scope reveals that option traders have been bullishly aligned toward WMT for some time now. During the course of the past 20 sessions, traders at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) have bought to open 20,205 calls, compared to 12,441 puts. The resultant call/put volume ratio arrives at 1.62.

As such, WMT's Schaeffer's put/call open interest ratio (SOIR) of 0.68 ranks lower than 97% of similar readings taken in the last year. In other words, short-term speculators have rarely been more call-heavy toward the stock.

Checking out the charts, it's not surprising to see this much optimism surrounding an equity that has climbed more than 13% higher in 2013. More recently, Wal-Mart Stores, Inc. has found a technical friend in the form of its 10-day moving average, which has helped lift WMT higher since late March. The equity is now trading at $78.35, a slight 0.04% away from its all-time intraday high of $77.60, which was tagged on October 16.

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

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