March 19, 2025
Trade Idea: WMT $85.59 (Walmart Inc.)
Buy May 16th $82.50 Puts $2.70
Trade Idea: WMT $85.59 (Walmart Inc.)
Buy May 16th $82.50 Puts $2.70
Walmart (WMT) has been on an incredible run, fueled by strong earnings, a tech-driven boost, and its reputation as a safe-haven stock. Since December 2023, the stock has more than doubled. However, its most recent earnings call fell short of Wall Street’s lofty expectations, with soft guidance disappointing investors.
Since its highs, WMT has pulled back nearly 20%, yet it still trades at an expensive 32.5x P/E. Consider its razor-thin margins: gross profit at ~25% and operating income at 4.3%. When dealing with massive revenue numbers, that kind of margin leaves little room for error.
Now, factor in Walmart’s reliance on imports from China and India—two countries directly in Trump’s crosshairs. If tariffs rise 10-25%, Walmart’s 4.3% operating margin provides little cushion.
The company has already tried to push tariff costs onto Chinese suppliers, but that didn’t go well. The New York Post summed it up best: “Walmart gets dressing-down from China after pleading with suppliers to absorb tariff costs: report”
And that’s just the supply side.
The demand side doesn’t look much better. Walmart’s core consumers are under financial pressure, cutting back on discretionary spending. Discretionary items carry higher margins, so changing the mix of sales - leaning on lower margin groceries - puts more pressure on overall margins.
Again, 4.3% is not a lot of wiggle room.
Valuation Check
Walmart’s expected EPS for 2026 is $2.64. At $85.59 per share, that gives us a 32.5x P/E. But here’s the problem—growth stocks work in reverse when earnings contract.
What happens if tariffs remain in place and earnings take a 10% hit, coming in at $2.38 instead?
Then, $2.38 x 32.5 P/E = $77.35.
But valuations will likely compress further. A more reasonable 27x P/E gives $2.38 x 27 P/E, or $64.26.
Walmart still has room to fall.
The Trade
Put options flow has been picking up ahead of the April 2nd tariff start date. Over the past week, there’s been a buyer of 10,000 WMT April 17th $80 Puts for ~$1.25. On Tuesday, they rolled up half to the $82.50 Puts bringing their net cost to $1.85.
They are clearly playing the April 2nd start date for the Tariffs. There is talk of a potential trade deal, but I don’t think that will happen so soon.
WMT earnings are due on May 15th.
I like the WMT May 16th $82.50 Puts for $2.70. The Target Stock Price is $72.50.
I’ll also be watching for an opportunity to sell the WMT April 17th $77.50 Puts if they trade up to $0.70-$0.75. Getting into that spread for $2.00 would be a great deal.
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