The Ceiling Is Coming for Whole Foods

by John Kmiecik | April 15, 2013 9:07 am

The market has had an unprecedented run higher, especially this past week, so many traders can’t be blamed for thinking a pullback is on the horizon. But no one knows for sure if it will come, when it will come and how deep the pullback will be — especially with the Dow Jones and S&P 500 trading at all-time new levels.

Here is a trade idea on stock that is extended, just like the market. The only difference is that it has a little resistance overhead.

Whole Foods Market (NASDAQ:WFM[1] — $88.01): Long Puts

The trade: Buy the May 88 puts for $3.40 or less.

The strategy: The long put strategy is pretty straightforward and generally used for a bearish outlook. The trade profits when the stock falls and the put premium increases as the WFM put option moves farther and farther in-the-money. Maximum profit is almost unlimited only because WFM can only fall to $0 (which is highly unlikely), and the maximum loss is $3.40 or whatever was paid if WFM finishes at or above $88 at May expiration. Breakeven is $84.60 based on a cost of $3.40 at expiration.

The rationale: Whole Foods is a high-end grocery store that sells top-of-the-line food products, including many healthy and organic foods. The store is rather expensive compared to other retailers such as Walmart (NYSE:WMT[2]) and Trader Joe’s that sell some similar products. It is not uncommon for people refer to the grocer chain as “Whole Paycheck” because of this.

The past two previous earnings announcements have not excited investors; the stock has gapped down on both occasions, finishing at least $6 lower each time.

WFMchart 300x134 The Ceiling Is Coming for Whole Foods
Click to Enlarge
Taking a look at the chart is where we see this trade idea come together. WFM has rallied into a resistance (previous highs and lows) right around $88 after a swift move higher. The stock has challenged that resistance area twice in about the last month, and resistance has been the victor both times.

If resistance wins the battle again, there is a good chance WFM might take another drop in price.

As of this writing, John Kmiecik did not hold a position in any of the aforementioned securities.

Endnotes:
  1. WFM: http://studio-5.financialcontent.com/investplace/quote?Symbol=WFM
  2. WMT: http://studio-5.financialcontent.com/investplace/quote?Symbol=WMT

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