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Calling a Bottom for Whole Foods

Put sellers look for the stock's recent pullback to stop

by 7/20/2012 2:27:26 PM
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In advance of earnings, bullish speculators on Whole Foods Market, Inc. (NASDAQ:WFM - 84.79) may be taking advantage of the stock's recent pullback to collect some premium and potentially name their own (reduced) buying price for the shares. Put volume is seven times greater than usual today, and some of this appears to have been the result of traders selling to open short-term options.

The out-of-the-money August 82.50 put has seen nearly 3,100 contracts trade today on open interest of under 1,500. Several early morning block trades changed hands at or near the bid price, suggesting they could have been sold to open. The average price these traded for was $2.67, and implied volatility before earnings on this soon-to-be-front-month option has ticked up to 43.6%. This is well above the grocer's 10-day historical volatility of 18%. Higher implieds mean higher option premiums, which is a boon for option sellers and a challenge for option buyers.

If these puts were in fact sold to open, it suggests the speculator: 1) believes WFM will stay above the $82.50 level through August expiration and 2) would be willing to buy WFM shares at the $82.50 price point (technically $79.83 given the $2.67 premium collected). Above the strike price, the put expires worthless and the seller keeps the entire premium as profit.

This level is significant from a technical perspective, as it is home to the stock's ascending 160-day moving average, which has helped to power the shares higher during the past year or so. What's more, the $82.50 region coincides with the equity's April and May lows. This double-barreled support could help propel the stock out of its recent funk and back into an uptrend.


Of course, a strong showing in the earnings confessional could only help matters, and the stock reports next Wednesday. Analysts are expecting per-share figures of $0.61, an 11-cent improvement over year-ago results. In the past four quarters, WFM has consistently topped these estimates to the upside -- by an average of almost 6%.

Heading into these results, speculative activity has been tilted toward the cautious side. The Schaeffer's put/call open interest ratio (SOIR) for WFM stands at 1.18, with puts outweighing calls nearly six-to-five in the front three-months series. On a shorter-term basis at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) , traders have bought to open 127 puts for every 100 calls during the past 10 trading days. This bearishness could be a positive contrarian sign, should WFM issue another positive earnings surprise and force these skeptics to capitulate.


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