Investors are known to overreact from time to time, and the action in Whole Foods (NASDAQ:WFM) might be a perfect example. This company continues to expand briskly and business continues to be healthy. Here is a trade idea that is counting on an overreaction and some ensuing bargain buying:
Whole Foods ($88.12): Long Calls
The trade: Buy the March 90 calls for $1.20 or less.
The strategy: The long call is one of the most basic strategies in options trading. The trade can profit if the stock rises and the call premium increases to an amount more than was paid. Maximum profit is unlimited because WFM can continue to rise, and the maximum loss is $1.20 or whatever was paid if WFM finishes below $90 at March expiration. Breakeven is $91.20 at expiration based on a cost of $1.20.
The rationale: Whole Foods released its earnings last week and shares tumbled. Revenue came in as expected, and EPS came in a penny better than Wall Street forecasts. So what happened? Even though the company had impressive same-store sales growth, it was less than expected, and WFM decreased its revenue guidance for the year, blaming the economy.
Click to Enlarge Was this an overreaction from investors? It might have been … plus, Whole Foods is showing some bullish technicals that could move the stock higher again.
WFM gapped down to an area where it has support and has reversed on three other occasions during the past six months. The stock also formed a bottoming tail (hammer candle) right at the $88 support, which is a possible reversal sign if the high of the candle is violated. Consider it to be a bullish sign if the stock trades above that high, which was $88.25.
As of this writing, John Kmiecik did not hold a position in any of the aforementioned securities.