After months of teetering about the $30 level, traders finally decided that Whole Foods Market, Inc. (NASDAQ:WFM) was too cheap. This is mostly due to the rumor mill of a buyout. It’s hard to short a stock under the looming threat of a positive headline. So there is an inherent put under Whole Foods stock.
Otherwise, from a technical perspective I would have bought July put spreads to catch a swing lower. It is technically vulnerable. If it loses $34.50 per share, it could fall another 4% from there.
From a trading perspective, I am willing and able to own WFM shares if they fall below $30 again, so I am prepared to risk a long trade for the next few months but that’s mostly because I can build in a big margin for safety. Otherwise, I’d have to wait for a better entry point. I’ve done this before as recently as this trade which delivered easy profits. Today’s trade is similar but on a different time frame.
Click to Enlarge Technically I like how WFM stock is holding the breakout from the channel that has plagued the shares since 2015. Fundamentally I am not a fan of Whole Foods’ financial metrics. Today’s write up is me betting on Wall Street’s perception of the stock. Meaning that I will trade WFM based on what the markets will value the stock not on what I think of it.
Perception of the masses is really what matters most.
The thesis for today’s trade is that WFM stock is likely to oscillate +/- 5% in the next few months depending on headlines, but it will eventually hold above the channel that it has been trading for months. And since I am willing to own the shares if the price falls more than 10%, I will generate income from selling downside risk against the fears of selloff.
WFM Stock Trade Idea
The Trade: Sell the WFM Jan 2018 $29 put and collect $1 per contract. I have an 80% theoretical certainty that I will retain maximum gains. But if prices fall below my strike, I will own the shares and accrue losses below $28.
I only sell naked puts if I am willing and able to own WFM stock. Otherwise, I use spreads instead.
The Safer Alternate: Sell the WFM Jan 2018 $29/$28 credit put spread. The safer aspect is not because it has a bigger buffer but rather because it has more finite risk profile. The spread still potentially delivers 20% yield. Compare this with buying the stock then hoping it rallies 20% just to match the performance of the spread.
Learn how to generate income from options here. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernic and stocktwits at @racernic.