Wal-Mart (WMT) lower on Target's (TGT) trouble

Wal-Mart Stores Inc. (NYSE: WMT) is much lower this morning after Target (NYSE: TGT) dramatically reduced its September sales forecast, down to just a 1.5% to 2.5% same-store sales increase from a previously anticipated 4%-6% increase, citing weaker-than-expected store traffic. Lowes (NYSE: LOW) cut its forecast for the year, citing dry weather conditions that have hurt sales of outdoor products. With these major retailers providing a dim outlook for the sector, WMT and other retail outlets are suffering in the market today. If you think this stock won't be rising too far in the coming months, then it could be a good time to look at a bearish hedged play on WMT.

After hitting a one-year high of $52.15 in October, the stock has been weak over the past year, falling to a 52-week low of $42.09 earlier this month. Wal-Mart opened this morning at $43.29. So far today, WMT has hit a low of $42.68 and a high of $43.30. As of 10:50, WMT is trading at $43.15, down $0.82 (-1.9%). The chart for WMT looks bearish but improving slightly, while S&P gives the stock a neutral 3 STARS (out of 5) hold rating.

For a bearish hedged play on this stock, I would consider a January bear-call credit spread above the $50 range. A bear-call credit spread is an options position that combines the purchase and sale of call options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make an 8.7% return in 4 months as long as WMT is below $50 at January expiration. Wal-Mart would have to rise by more than 15% before we would start to lose money.

WMT has not been above $50 since June, and has shown some resistance around $46.30 recently. This trade could be risky if the company's earnings (due out 11/13) are a positive surprise, but with the reports out today, that looks less likely.

Brent Archer is an options analyst and writer at Investors Observer.