NEW YORK (TheStreet) -- Wal-Mart Stores (WMT) - Get Walmart Inc. Report shares are giving off both bullish and bearish signals, meaning the stock could make a significant move in either direction. At times like this, trading the actual stock can be tricky, but using some specific stock options strategies can pay off.
First, the fundamentals: Wal-Mart is one of the strongest and most consistent companies around. With a 3.07% dividend yield, the payout ratio is 38%, up from 22% a decade ago. Dividends have been raised every year for 10 years. The latest annual range for the price-to-earnings ratio was a modest 14-18. Revenue has risen in 10 of the last 10 years, and earnings have risen in nine of the past 10. Lastly, the debt ratio has remained steady and was at 31.5 last year.
It's difficult to find anything in the fundamentals to complain about. So what is going on with the stock's price?
The chart reveals that since early March, Wal-Mart shares have dropped 22% (from $82 down to about $64). After the Aug. 24 big drop in the overall market, Wal-Mart has remained in a range between $62 and $66, and in recent days, the daily trading range has been very narrow.
In spite of the low price action, Wal-Mart's price signals were bullish last week. From Aug. 25 through Aug. 27, a bullish signal emerged in the form of a three inside up indicator. This was confirmed by a rare but strong bullish tri-star signal immediately after.
However, these strong bullish price signals were contradicted by momentum. The moving average convergence divergence saw both moving averages below the signal line through the last six months, and last week's bearish signals were at the lowest. Combined with the narrow trading range of recent days, this is a confusing set of signals.
The strong fundamentals and contradictory signals make the future uncertain. However, with support slightly above $70 in July, what happens if price moves above that level? Before that period, price was declining gradually with very narrow daily trading range. So at this point, price could jump sharply or just continue its gradual downward move.
This raises some possibilities with options. A trader who is willing to put less than $250 at risk for the next five weeks could benefit if price rises above $70 or falls below $60. Here's how.
A long spread with expirations in 38 days can be created with the following (based on Friday's close):
OCT 67.50 call, ask 0.78 plus 0.09 trading costs = 0.87, or $87.
OCT 62.50 put, ask 1.51 plus 0.09 trading costs = 1.59, or $159.
The total cost of these two trades is $246, and upside break-even is at approximately $70 per share (call strike of 67.50 plus 2.46 points = 69.96). Downside break-even is approximately $60 per share (put strike of 62.50 minus 2.46 points = 60.04). Even though the loss range is 10 points wide, a trader has 38 days to see the stock price move above $70 or below $60.
This long spread makes sense only if a trader believes Wal-Mart has a good chance for a strong move in either direction but is not sure which direction will dominate. For a maximum loss of $246, any substantial movement in Wal-Mart's price could produce a net profit.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.