Whole Foods Market, Inc. (WFMI: sentiment, chart, options) is up more than 2% today, with the shares catching a lift after consolidating into support at their 10-month moving average. This formerly resistant trendline has guided the equity cautiously higher since March 2009, underscoring WFMI's 52-week gain of nearly 152%.
Despite today's pop, WFMI is still struggling to break out of its recent trading range. Since early November 2009, the shares have ricocheted between support at the $25 level and resistance in the $30 region.
More recently, the lower rail of this sideways channel has been lifted, with WFMI enjoying a boost from its 160-day moving average. However, the stock's 80-day trendline is lingering near the upper rail of its trading range, which could reinforce resistance in this area.
There's no news from WFMI that has sparked the equity's positive momentum today, but traders could be reacting to a positive write-up that appeared in The Wall Street Journal over the weekend. "Recent signals suggest [WFMI] is on the road to recovery," observed reporter John Jannarone, noting that "the food retailer is worth adding to your list."
This high-profile endorsement precedes WFMI's upcoming turn in the earnings spotlight. The grocer is slated to unveil its fiscal first-quarter results after the market closes next Tuesday, Feb. 16. Heading into the event, analysts surveyed by Thomson Reuters are looking for a profit of 26 cents per share on sales of $2.6 billion. In the same period last year, WFMI banked a profit of 20 cents per share.
The natural grocery chain has a solid history in the earnings spotlight, having bested Wall Street's consensus expectations in each of the previous four reporting periods. Accordingly, option players have been loading up on bullish bets as the event approaches.
During the past 10 days, traders on the International Securities Exchange (ISE) have bought to open 1.31 calls for every put on WFMI. This ratio ranks higher than 93.3% of other such readings taken during the past 52 weeks, indicating that speculators on the ISE have rarely shown a greater appetite for calls over puts. Of course, with a whopping 11.9% of the equity's float dedicated to short interest, it's possible that some of these calls were purchased as hedges in advance of the company's earnings report.
Meanwhile, in today's trading, another speculator placed a directionally neutral bet on major post-earnings movement. Shortly after the open, two blocks of 99 contracts apiece changed hands -- one at WFMI's at-the-money February 28 call, and the other at the stock's February 28 put. Both blocks traded near the ask price, suggesting they were purchased.
In other words, this is the initiation of a long straddle. By buying an equal number of puts and calls at the same strike, the trader is looking to capitalize on a substantial price swing in the underlying equity. Because both bullish and bearish options are employed, the direction of the move doesn't matter -- only its magnitude. Since the trader must shell out for two options, rather than one, the initial cost of entry is higher than with a one-legged option play. By the same token, the underlying shares need to move that much more dramatically to offset the increased initial premium.
This particular spread was opened for a net debit of $2.82. So, by the time February-dated options expire next Friday, the straddle player needs WFMI to rise above $30.82 (the strike plus the net debit), or fall below $25.18 (the strike minus the net debit). Considering the parameters of the stock's current trading range, this is a fairly ambitious wager.
While the straddle is an ideal way to trade around an earnings event without the risk of picking a directional bias, it's not necessarily a cheap strategy. That's because implied volatility tends to rise ahead of known events, which in turn pushes option premiums higher. By way of example, WFMI's Schaeffer's Volatility Index (SVI) has vaulted from its late December low of 30% to its current perch near 66%.
In fact, WFMI's February 28 put and call are pricing in implied volatility of roughly 70%, compared to the stock's one-month historical volatility of just 32%. If you're tempted to buy options on WFMI ahead of earnings, this is definitely a point to consider.
Rather than doubling up on premiums paid, it might be worth your while to consider a hedged directional play -- for example, if you're bullish, a long call spread could be a viable strategy. Alternatively, skeptical traders might want to consider a long put spread. In both tactics, the increased premium of your purchased options will be partially offset by the sale of another option at a separate strike.
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