Jim Strugger's Option Strategy For Wal-Mart

Wal-Mart Stores, Inc. WMT is scheduled to report its second-quarter earnings before markets open for trade on Tuesday. MKM Holdings Derivatives Strategist Jim Strugger was on Bloomberg TV to reveal his option play on the stock.

The Reasoning

"Patrick McKeever covers the stock for us -- he has it Neutral rated at $77 fair value," Strugger began. "So little bit of upside to that, but he really expects another lackluster quarter and we represent that in our trade. So, consensus EPS is for $1.13, he is right about on that number. So, little bit of EPS pressure, FX has not helped these guys as with other retailers, and then consider Kohl's last week was down more than 8 percent on earnings. So certainly pressure on some of these larger retailers."

He continued, "What we want to do though is look out over the next several months. Whether real or perceived, two factors that could help out not just Wal-Mart, but some of the other retailers. Number one is the yuan devaluation...real or perceived, that could be helpful to the stock...Over the next few months the other point is commodity prices lower, gas prices also could help consumption."

The Trade

"So, what we want to do is we want to buy a calendar call spread. What that means is if you look at August implied volatility, these options expire this Friday. Implied volatility is almost 40 percent. If you go out to December, they are about 20 volatility points lower."

"Not terribly unusual, but we want to exploit that. So what we want to do is, we want to sell a 75 strike Call that expires Friday, we want to turnaround buy December 77.5 strike Call. You pay about $0.60 for that, obviously with the expectation that there's not a whole lot of movement post-earnings," Strugger concluded.