Upscale and health-conscious grocer Whole Foods Market (WFM) has been anything but green lately, as shares have withered away during 2015. But in conjunction with a buy-write strategy in Whole Foods stock, more fertile technical and income support may be here for bulls. Let me explain.
Despite last week’s back-to-back price plunge and quick test of year-to-date lows in the S&P 500 to establish a loss of 3.7% for 2015, the market’s pain has been nothing compared to Whole Foods stock.
Bulls in Whole Foods stock have been ravaged by drought-like conditions over the past six months which have left shares wilting by a bit more than 43% since its mid-February peak, while registering a decline of roughly 37% since the beginning of 2015.
Much of the backlash in Whole Foods stock stems from a company package mislabeling misstep which slighted consumers, back-to-back disappointing earnings reports and increased competition from the likes of grocery giant Kroger (KR) and smaller up-and-comers like Fresh Market (TFM) and Sprouts Farmers Market (SFM).
On the upside, Whole Foods is making inroads to challenge competitors with fresh initiatives such as its new smaller “365 by Whole Foods Market.” Whole Foods stock also sports a dividend of 1.6% that should stand to grow over time, and it maintains healthy operating cash flow and ROE of 15.4%.
Monthly Whole Foods Stock Chart
For investors looking to nibble on and nourish their portfolios with Whole Foods stock, there’s also the technical seeds for a low with WFM’s share decline this year. Looking at the monthly view, we can see Whole Foods stock is slightly below its 50% Fibonacci retracement level that’s based on a cycle low from late 2008.
Using Fibonacci as a technical guide for support in Whole Foods stock, it would be nice to see the current testing of 50% hold. However, as long as the 62% level near $27 is maintained, this strategist is inclined to view WFM favorably and setting up for a longer-term period of stock growth for shareholders.
Not only is 62% important as a key support in of itself, this price level is just below where we would expect the completion of a two-step or mirror move in Whole Foods stock.
This Fibonacci-based pattern is defined by similar-size price moves in stock. In this instance, the downswing from A to B and the current C to D decline would match up if shares of Whole Foods stock tests the $28 – $28.50 area.
Whole Foods Stock Buy-Write Strategy
If you believe the low in WFM is closer, rather than farther away from current levels, a buy-write strategy on Whole Foods stock can be considered a reasonable way to position.
Checking the board in Whole Foods stock and one strike to write or sell against the long stock position which makes sense is the September $33 call. With shares of WFM finishing Friday’s market bagging at $31.70, the call fetches 64 cents midmarket for a buy-write package price of $31.06.
By adding an initial monthly income stream of nearly 1.9%, traders taking the longer-term view on Whole Foods stock can reduce their cost basis over time and on top of collecting WFM’s quarterly payout.
And if Whole Food stock simply starts to move higher without additional and lower technical testing, the buy-write affords a nice paycheck of about 6% in just a month’s time. Now that might not be a “Whole Paycheck” but it’s pretty sweet compared to asparagus in water.
Disclosure: Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT
