Whole Foods Market, Inc. (WFM) is down 10% year-to-date. The recent earnings report was badly received by investors. Fundamentally, WFM competes in a viable trend of healthier living.
A major problem for Whole Foods is that it’s too expensive for the average shopper. It is often referred to as “Whole Paycheck” instead of Whole Foods. I personally almost never go there as I can’t justify paying more for perception.
I say perception because I’ve bought a few things at WFM and have had a below-average experience.
Having said that, WFM has its following both from Main Street shoppers and Wall Street investors.
Technically, WFM stock is choppy. For the short term, the current level is important to hold. WFM needs to hold the $30 per share area. Just below, the $29 per share trend line holds a potential trap door with scary consequences. So far, the open interest for the September options contract suggests support around $29.70 per share.
WFM Stock Trade
Click to Enlarge Traders punished WFM stock for the earnings they just delivered. But this is not the first of such sell offs. It has had four other drops in the last ten months and all of equal size. I noted those with green lines on the chart. Today I want to set a pair trade to generate income from this range.
Trade No. 1: Sell Nov $26/$25 credit put spread. This is a bullish trade for which I collect 15 cents per contract. This trade has a 90% theoretical chance of success and a potential yield of 18%. Ideally, I need WFM to stay above $26 per share through mid-November.
I can hedge my trade by adding another side that is bearish.
Trade No. 2: Sell WFM Nov $35/$36 credit call spread. This is a bearish trade for which I collect 10 cents per contract. This trade also has a 90% theoretical chance of success. The potential yield if successful is 11%.
Ideally, I need WFM to stay below $35 per share through mid-November.
Taking both trades would leave short a WFM November iron condor. This is a self-hedged trade for which I collect a 25 cents net credit. The overall yield if successful is 33%. For that, I need WFM to stay between $26 and $35 per share until expiration. I am not obliged to hold either of these trades through to their expiration dates. I can close either for partial gains or losses at any time.
Click to Enlarge If I am purely bullish WFM stock, then I can only take the bullish side and stand to gain 18% yield on money risked.
The range I am trading today has held well but I have to recognize that there is a systemic market-wide risk to this trade. The SPDR S&P 500 ETF Trust (SPY) is at record levels and on arguably deteriorating conditions.
So we could get a market-wide correction, especially if the U.S. Federal Reserve raises rates in the fall. This would impact this trade as WFM could lose the $29 level and test $26.
This iron condor should be easy to manage and has limited and finite risk. But still I would employ tight stops slightly under breakeven.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernic and StockTwits at @racernic.
