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Whole Foods Market, Inc. (WFM) Rally Sparks a Rush of Call Buying

Whole Foods Market, Inc. call volume tripled the daily average on Wednesday

by 8/28/2014 9:33 AM
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A mysterious tweet from activist investor Carl Icahn sent shares of Herbalife Ltd. (NSYE:HLF) soaring yesterday, and may have been the catalyst for Whole Foods Market, Inc.'s (NASDAQ:WFM) 3.4% pop, as well. Regardless, the move higher had call players flooding the stock's options pits, with volume running at three times the daily average. Short-term contracts were in high demand, as evidenced by the equity's 30-day at-the-money implied volatility, which surged 18.9% to 24.0%.

The two most active WFM options were the weekly 8/29 40- and 40.50-strike calls, with all signs pointing to the purchase of new positions. The volume-weighted average price (VWAP) for the lower-strike calls was $0.19, making breakeven at tomorrow's close $40.19 (strike plus VWAP). Based on the VWAP of $0.21 for the higher-strike calls, breakeven for these more optimistic option traders is $40.71.

On the charts, WFM has been a long-term laggard, with the shares off more than 31% year-to-date. However, yesterday's surge and subsequent finish at $39.80 were enough to secure the stock its first daily close north of its 80-day moving average since March 21. With 10.5% of the equity's float sold short, a portion of yesterday's call buying may have been a result of shorts initiating hedges on any additional end-of-week gains.

In today's session, though, Whole Foods Market, Inc. (NASDAQ:WFM) is poised to resume its downward trajectory, after Wedbush started the security with a tepid "neutral" rating. This echoes the withstanding trend seen among the brokerage bunch, as half of covering analysts currently maintain a lukewarm "hold" suggestion toward WFM.


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