Walmart Is Up on Higher Earnings Outlook Creating Options Opportunities

Walmart (WMT) produced outstanding earnings for Q3 this morning, exceeding expectations. In addition, the retailer boosted its full-year profit guidance. Given that the stock is down year-to-date, this creates opportunities for options investors with hopes of a spike in WMT stock.

In pre-market trading WMT stock is up $10.40, to $148.80. That represents a 7.5% spike in the stock.

On Nov. 15, Walmart reported that its total revenue was up 8.7% across the company, and its Sam's Club unit revenue was up 10% year-over-year (YoY). Last quarter the company reported that sales rose just 6.5%, so its revenue growth is accelerating.

Moreover, instead of expecting operating income to decline 9% to 11%, now the company says the decline will be just 6.5% to 7.5%. As a result, analysts are likely to raise their full-year (to Jan. 31) expected earnings per share (EPS) estimates.

More importantly, the company reported that it is still generating free cash flow (FCF). Year-to-date (YTD) its FCF is $3.7 billion, which means it generated $1.9 billion during the quarter. Last quarter the YTD FCF  total was $1.7 billion.

As a result, the company is continuing its buybacks and dividends. So far this year it has spent $4.5 billion on share repurchases, which represents 1.1% of its $387 billion market value. That allows the company to boost its dividends per share and could help push the stock higher.

Analysts Are Still Positive on the Stock

For example, for the year ending Jan. 2023, analysts have an average EPS estimate of $5.85 per share. For Jan. 24, the estimate is $6.56 per share. 

This puts the stock on a forward P/E multiple of 22.5x. If analysts raise their target estimates by 10%, the P/E multiple for Jan. 24 will fall to just 20.3x.

Call Options Look Attractive

For the expiration period ending Dec. 23, call options ended at $1.66 for the $148 stock price. When the stock opens these calls will be in the money and are likely to shoot up pretty dramatically.

Investors should look at slightly higher strike prices at the opening of trading as these calls could be worth buying. However, there will be a lot of risks here, since it is difficult to make money on shooting call prices.

Another way to play this is to let the calls shoot up and then pick a higher out-of-the-money (OTM) strike price for a near-term expiration and then short those calls. This assumes that the investor has an underlying position in the stock (i.e., at least 100 shares per call option contract that is shorted).

One can also buy long calls at one strike price and then short much higher OTM call strike prices, to create a “poor man's” covered call play. This assumes that the investor does this with the same strike expiration period and the same number of call option contracts on each leg. Many brokerage firms will allow this kind of trade as the long call provides liquidity to fund the potential liability of the short call.

Either way, expect to see fireworks today in Walmart's call option contracts.

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