Walmart is currently the most overbought Dow stock with a daily RSI reading of 82.62. It’s hard to argue with that strength, but after a 1-month, unrelenting up move, I think it’s time for a pause via some sideways consolidation.
Late last month I mentioned that “momentum might carry it a bit higher before it starts to stall out”.
So far, we’ve seen the first part of that come true with momentum carrying the stock from $110 to $114.60.
With the stock trading above an RSI reading of 70 for the best part of a month, it’s now time for WMT to consolidate sideways. Yes, there may be some further upside, but I doubt it will get above $120 in the short-term.
On June 28th, I mentioned I would look at selling the August 120-125 call spread if it traded at about $0.55 – $0.60. At the moment, that spread is still only at $0.50.
I ended up going with a Sept 120-125 bear call spread in order to give the trade more time to work out. I’m also expecting a general market correction some time in mid to late August, so that should coincide nicely with this spread and give me a good opportunity to take profits.
The Sept 120-125 spread is currently trading around $0.85 which represents a 20.50% return on capital.
If the spread blows out to $1.70 I’ll look to either take losses or roll out in time and possibly up in price.
Conservative traders might want to wait until the Sept spread gets out to $1.00 before entering.
Disclaimer: The information above is for educational purposes only and should not be treated as investment advice. The strategy presented would not be suitable for investors who are not familiar with exchange traded options. Any readers interested in this strategy should do their own research and seek advice from a licensed financial adviser.