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Whole Foods Market, Inc. Buyout Rumors Lure In Option Bulls

Call buyers are eyeing Whole Foods Market, Inc.'s July 42 strike

by 6/5/2014 3:01 PM
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Whole Foods Market, Inc. (NASDAQ:WFM) has rallied more than 4% this afternoon to trade at $40.03, which Trade-Alert credits to unsubstantiated rumors of a takeover by privately held supermarket chain Publix. At the same time, options volume has exploded -- especially on the call side, where intraday volume is running at more than six times the expected amount. Short-term contracts are in vogue, too, as evidenced by the 22.3% rise in WFM's 30-day at-the-money implied volatility (IV), which now sits at 25.9%.

Most active by an approximately two-fold margin is the organic grocer's July 42 call. Over 13,500 contracts have been exchanged here -- two-thirds at the ask price, suggesting they were bought. Furthermore, IV is nearly 6 percentage points higher, and volume outstrips open interest, collectively hinting at freshly bought bullish bets. This theory is confirmed by data from the International Securities Exchange (ISE), as well as Trade-Alert.

By purchasing the calls for a volume-weighted average price (VWAP) of $0.46, today's traders expect the stock to rally north of $42.46 (strike plus VWAP) by the close on Friday, July 18, when back-month options expire. At expiration, gains are theoretically unlimited beyond this breakeven mark. Meanwhile, the maximum potential loss for the buyers is limited to the initial premium paid, should the traders be holding onto out-of-the-money calls at expiration.

During the past two weeks, speculators on the ISE, Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) have strongly preferred long calls to puts. Specifically, Whole Foods Market, Inc.'s (NASDAQ:WFM) 10-day call/put volume ratio across those three exchanges is 2.47, which rests above 85% of comparable readings, looking back one year. However, some of these bullish bets may have been the work of short sellers hedging -- after all, short interest on WFM increased 17% during the most recent reporting period, and now accounts for a healthy 6.8% of the stock's float.

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