Why Walmart’s (WMT) Stability Attracts Shrewd Options Traders

Walmart WMT +0.75% ▲ and its relevance amid rising economic challenges aren’t exactly surprising. While the company clearly is exposed to the consumer discretionary market, its big-box business model is durable for selling key necessities at everyday low prices. When finances get tight for millions of households, retailers often suffer from the trade-down effect.

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Essentially, consumers quit frivolous luxuries that they don’t need rather quickly. However, the necessities of life aren’t axed in the same manner. Instead, people choose increasingly cheaper product variants. They seek out substitutes. For example, instead of top-shelf organic food, many shoppers may opt for generic brands. Walmart sits near the bottom of the trade-down chain, thanks to a combo of its low prices and massive scale.

As such, there’s no real reason for investors or options traders to fight the fundamental tape. Sure, WMT stock is an obvious idea — but obviousness alone doesn’t necessarily make or break an investment thesis. In this case, there’s a lot to like about Walmart, and it comes down to information by omission. As a result, there is a bullish opportunity available via a speculative options approach.

Volatility Skew Provides Key Intel for WMT Stock

For retail traders, one of the most important pieces of data you can consider is volatility skew. Definitionally, volatility skew identifies implied volatility (IV) — or a stock’s potential range of motion — across the strike price spectrum of a given options chain. What it comes down to is that the skew is a visual representation of volatility’s surface-area distortion.

Theoretically, if there were no positional bias among options traders for a particular security, the skew would be perfectly flat. Of course, something like WMT stock never lacks in bias. It’s one of the most actively traded securities on Wall Street, and the collective ebb and flow of institutional orders leaves a sentiment signature of sorts.

In the case of WMT stock, what’s most interesting is what’s not happening. Although Walmart is off to a strong start, up over 10% year-to-date amid challenging economic circumstances, smart money traders are not rushing to hedge against downside risk. Indeed, for the strikes near the spot price, the skew’s surface area distortion is minimal.

To be sure, the overall posture is to protect against downside tail risk, with the skew curving upward in the left boundaries (toward lower strike prices). However, this accelerative property is controlled, meaning that the hedging activity is hardly unusual for an entity like WMT stock.

That’s modestly reassuring for those who are considering going long Walmart in the short to intermediate term. No, the smart money isn’t perfectly prescient but it has resources that retail traders lack. If these folks aren’t shrinking into a defensive shell, there could be more capital growth to be extracted.

Identifying the Trading Parameters of Walmart Stock

Although the volatility skew reveals the positional bias of the smart money, we still need to understand how this translates into actual outcomes. For that, we may turn to the Black-Scholes-derived expected move calculator. For the March 20 expiration date, Wall Street’s standard mechanism for pricing options projects that Walmart stock will land between $117.61 and $128.21.

The dispersion naturally arises because the Black-Scholes model assumes a world in which stock market returns are lognormally distributed. Under this framework, the above range represents where WMT stock could symmetrically fall one standard deviation away from spot (while accounting for volatility and days to expiration).

Mathematically, the model asserts that in 68% of cases, we would expect Walmart stock to land in the prescribed range 28 days from now. However, this model only tells us how the smart money is pricing risk; we need to assess whether the pricing is justified.

Conceptually, the ideal analogy to explain the above conundrum is to consider a typical search-and-rescue (SAR) mission. If Walmart stock were a lone shipwrecked survivor, then Black-Sholes would be a satellite system that identified a distress signal somewhere in the Pacific Ocean. Based on theoretical drift patterns, we can establish a search radius based on this signal.

Unfortunately, we live in a world of limited resources. We can’t just search the entire radius for one person. To maximize our personnel and equipment, we need to use probabilistic methods to estimate where WMT stock might be located. This is where the Markov property becomes priceless.

Narrowing Walmart’s Probability Space

Under Markov, the future state of a system depends entirely on the present state. Colloquially, this principle holds that forward probabilities should not be calculated independently but assessed in context. In the above SAR analogy, different ocean currents — such as choppy waves versus calm waters — will likely influence drift patterns.

Image showing standard and bimodal distributions for WMT stock. Credit: Joshua Enomoto

With that analogy in mind, here’s how the Markov property is relevant to Walmart stock. In the past five weeks, WMT stock has posted three up weeks, leading to an overall upward trend. This formation is also occurring against the backdrop of a sizable one-week loss of over 7%.

By itself, there’s nothing special about this 2-3-U sequence, per se. However, this quantitative signal represents a unique type of ocean current. Therefore, survivors caught in these waters would be expected to drift in a particular manner.

From here, we can use enumerative induction and Bayesian-inspired inference to best estimate where WMT stock is likely to drift. Basically, we would apply the median pathway associated with the 2-3-U sequence and apply it to the current spot price.

With full disclosure, the future is not necessarily compelled by the past, per David Hume’s famous critique of inductive methodologies. Operationally, though, I would argue that induction is the best tool that we have for estimating forward price distributions.

Image showing WMT’s risk topography in three dimensions. Credit: Joshua Enomoto

If you accept the premise above, we can calculate a forward five-week distribution for WMT stock, with a range of $122 to $128 and a probability density peaking near $124. Realistically, that would make the 120/125 bull call spread expiring March 20 arguably the most palatable trade. This wager carries a breakeven price of $123.20 but the problem is that the maximum payout is only a bit over 56%.

For the next leg up (while maintaining a relatively low net debit), you’re looking at the 125/130 bull call spread. The risk here is that the $130 strike is aggressive from both the Markov and Black-Scholes perspectives. However, the maximum payout stands at almost 209%.

Is Walmart a Buy, Sell, or Hold?

Turning to Wall Street, WMT stock has a Strong Buy consensus rating based on 27 Buys, two Holds, and zero Sell ratings. The average WMT price target is $138.50, implying ~10% upside potential over the coming 12 months.

A Simple Thesis with Strong Upside

There’s undeniable appeal in backing a bold contrarian bet—but more often than not, when experienced investors avoid a narrative, there’s a reason. With Walmart, the story isn’t flashy or complex. It’s a straightforward, defensive play built for challenging economic conditions. And while WMT stock may not be exotic, simplicity doesn’t preclude strong rewards.

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