‘Hysteria and listeria’ — they’re the right kind of ingredients for an oversold purchase in turnaround play Whole Foods Market, Inc. (WFM). But for contrarian traders who demand a layer of protection, an out-of-the-money bull put spread in WFM stock is a smarter way to suit up.
Let’s start off by stating we don’t dismiss potential health scares like the one found at Whole Foods. Shares of WFM sunk lower by around 5% Wednesday following an FDA warning letter issued due to unsanitary conditions at a Whole Foods processing facility in Massachusetts.
Nevertheless, and as history has mostly proved, when there’s blood on the streets — or in this case a dirty mess in the factory — a panicked investor reaction plus a turnaround story just getting underway should translate into value for WFM stock at current prices.
The fact of the matter is after a couple years of WFM investors being frustrated by unwanted items such as reduced guidance, a pricing scandal, increased competition and margin threats, Whole Foods is finally turning things around for investors.
WFM Earnings haven’t been uniformly terrific just yet, but in topping low expectations the past two quarters and a fresh growth catalyst in its 365 stores targeting value-oriented markets and complimenting its existing chain — the situation at Whole Foods ‘had’ begun to receive investors seal of approval.
Shares of Whole Foods recently hit a 10-month high following a strong rally of around 25% after a test of five-year lows in front of its most recent earnings release.
Now and following some already aggressive market-related profit-taking over the last week, Wednesday’s WFM stock scare has effectively put Whole Foods firmly, but securely, back in the bargain bin.
WFM Daily Stock Chart
Wednesday’s sixth-straight session of increasingly aggressive pressure in WFM stock from its intermediate-term high has produced an oversold condition that’s landed firmly into an area of solid technical support.
In our view, buying into the turnaround play at what appears to be an artificially low price is supported by an oversold stochastics indicator, lateral support defined by the past three earnings events and lower Bollinger support near the $30 decade level.
Shares could always move lower, but given the evidence, we see deeper testing as having been vastly reduced. Longer-term, it’s our view WFM investors will wish they shopped from the current bargain bin on Whole Foods price chart.
Whole Foods Stock Bull Put Spread Strategy
After reviewing the options board, the WFM July $30 / $28 bull put spread is an attractive way to begin a position in Whole Foods with a limited risk strategy.
Priced for 48 cents with shares of WFM at $30.63, the received credit allows for an expiration breakeven of $29.52, roughly 4% below current levels. Above $30, the entire credit is collected and yields a return of 24% for a one-month holding period.
As with a buy-write, the idea is to collect the premium in WFM stock, which, despite being oversold, probably has limited upside in the short-term.
On the other hand, with the bull put spread, we’re guaranteed to prevent unnecessary larger losses if our thesis is simply wrong and shares fall aggressively lower from here.
Bottom line, with a current 20-cent differential between the two WFM strategies, that’s money well forfeited in case a situation of ‘hysteria and listeria’ no longer rhymes with history.
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.
