September 26, 2018

Where is the Next Shoe Going to Drop?

The trade war is really heating up and we have seen multiple industries hit.  One that we haven’t seen or heard much about yet is the retail sector.

At this point, retail has been insulated from most of the tariff situation but if the rhetoric continues, watch out.  Wal Mart is a retail leader and actually, approximately 75% of Walmart’s merchandise comes from Chinese suppliers. So what can I do with this?

I am looking for a “cheap” opportunity to play a downside move in WMT.  When I say cheap, I’m referring to both a dollar investment but more importantly an opportunity which will offer fantastic REWARD to RISK.

Here is what I’m looking at:

The options market is pricing in an expected move between now and the November 2nd Weekly Options Expiration of about $4.50.  If the move is to the downside we can look at a target of about $90 – $91.  Based on this the November 2nd Expiration 94/90/89 Broken Wing Butterfly Put Spread is extremely attractive.  This can be bought for about $0.90 which provides a maximum Reward to Risk of over 3:1.  The beauty of this is that my risk is completely defined. I can never lose more than my investment of $0.90 per spread.

about the author:

Scott Bauer

A respected market commentator seen on Bloomberg, Fox Business, CNBC and other major financial networks, Scott Bauer has 25 plus years of professional equity and index options experience at the Chicago Board Options Exchange (CBOE) and Chicago Mercantile Exchange (CME) and as a Vice-President/trader for Goldman Sachs. Scott graduated with Honors from the University of Illinois Business School and has taught classes both at his alma mater and at the CBOE.

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