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Is Whole Foods Headed for Record Highs?

WFM fans are flocking to front-month calls

by 11/2/2012 1:17 PM
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The shares of Whole Foods Market, Inc. (NASDAQ:WFM - 97.71) are bucking the broad-market trend lower this afternoon, and it looks like more than a few options traders are gambling on even more short-term upside for the stock. At last check, WFM has seen roughly 5,700 calls cross the tape -- about five times its average intraday call volume. For comparison, just over 3,100 WFM puts have changed hands thus far.

Digging deeper, most of the action has centered around the November 97.50- and 100-strike calls, which have seen around 1,650 and 1,200 contracts traded, respectively. The majority of the calls have crossed at the ask price, and implied volatility was last seen more than five percentage points higher at each strike, hinting at buy-to-open activity.

By purchasing the calls to open, the buyers are expecting WFM to continue today's climb. Specifically, the volume-weighted average price (VWAP) of the November 97.50 calls is $4.03, meaning the buyers will profit if the security conquers the $101.53 level (strike plus premium paid) within the next couple of weeks. Meanwhile, the VWAP of the November 100 calls is $3.02, indicating a breakeven level of $103.02 -- in territory not yet charted by the shares. However, should WFM remain south of these levels, the most the buyers stand to lose is limited to the initial premium paid for the calls.

That's not to say WFM options are cheap right now. Heading into next week's earnings release, the stock's Schaeffer's Volatility Index (SVI) has powered higher amid escalating demand for WFM's short-term contracts. Now, the SVI sits at 43% -- above 59% of all other readings of the past year. In other words, WFM's near-term options are relatively expensive at the moment.

WFM Schaeffer's Volatility Index

Broadening our sentiment scope, we find that today's appetite for bullish bets runs counter to the recent trend seen on the major options exchanges. The stock sports a 10-day put/call volume ratio of 1.33 on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), indicating that traders have bought to open more WFM puts than calls during the past couple of weeks. Even more telling, this ratio ranks in the 74th percentile of its annual range, suggesting speculators have initiated bearish bets over bullish at a faster-than-usual clip.

Echoing that, the security's Schaeffer's put/call open interest ratio (SOIR) now stands at 1.18, indicating that puts outnumber calls among short-term options. What's more, this ratio registers in the 68th annual percentile, implying that near-term options players are more put-biased than usual right now.

Elsewhere on Wall Street, short interest accounts for 3.1% of WFM's total available float. At the stock's average daily trading volume, it would take almost a week to repurchase all of these pessimistic positions.

At last check, the shares of WFM have soared 3.4% to explore the $97.71 level. From a longer-term perspective, the equity has skyrocketed more than 36% in 2012, led higher atop its 10-week and 32-week moving averages. In fact, the security pulled back to the latter of these trendlines just last week, but has since regained some ground, and could reclaim a perch atop the former trendline for the first time in about a month.

Fundamentally, Whole Foods is slated to unveil its fiscal fourth-quarter figures after the closing bell on Wednesday, Nov. 7. From an historical standpoint, the company has topped analysts' bottom-line predictions in each of the past four quarters, according to Thomson Reuters. Another solid earnings surprise could trigger a reversal in sentiment on Wall Street which would bode well for today's option bulls.


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