The market looks like it’s no closer to figuring out which direction it wants to face. Regardless, there’s still a handful of opportunities out there … if certain requirements are met. Here is a trade idea on a possible reversal of Whole Foods (WFM) stock that will need some help from the bulls to succeed.
Whole Foods Market (WFM — $57.26): Call Debit Spread
The trade: Buy the WFM Dec 57.5/60 Bull Call Spread (buying the Dec 57.5 call and selling the Dec 60 call) for $1 or less.
The strategy: The maximum potential profit for this trade is $1.50 ($2.50 – $1) if Whole Foods stock is trading above $60 at December expiration. The maximum loss is $1 (or what was paid for the spread) if WFM is trading below $57.50 at December expiration. Breakeven is $58.50 at expiration based on a cost of $1.
The rationale: Whole Foods earnings were just reported, and investors did not like what they heard. WFM stock plunged on lower-than-expected sales, and they also announced that 2014 profits would be slightly less than previously forecast. Whole Foods has dealt with adversity before, but this time it is coming from increased competition in the form of more natural food grocers. Whole Foods still is looking to open more than 30 stores in 2014.
Earlier this year, market participants thought maybe natural and organic food sales were softening, but that proved to be a moot point as sales increased — as did the Whole Foods stock price. So is the stage now set for another recovery?
Click to Enlarge One of the most interesting occurrences of this gap lower is where WFM stock gapped down to. There is a pivot level that acted as support for Whole Foods stock in the past, at about $58, and WFM currently is hanging about a dollar below that level. This sets up the potential for a reversal.
If Whole Foods stock can suppress its urge to move lower in this unstable market, it stands a decent shot of moving higher once again. December expiration gives this trade idea a fair amount of time to succeed. Consider it a bullish sign if WFM shares move over $58 again, and a bearish sign if they are not able to in the next few sessions.
As of this writing, John Kmiecik did not hold a position in any of the aforementioned securities. Get a free trial of John’s live options trading room here.