Whole Foods Market, Inc. (WFM) has successfully struck its name from Wall Street’s naughty list and now sits among other good little stocks on the nice list. The recent turnabout in its behavior has been a godsend for shareholders still licking their wounds from the epic tumble in WFM stock earlier in the year.
As of July WFM was one of the worst performing stocks in the entire market down as much as 45% from its all-time highs near $65. While it took a couple months to shake off the sickness of underperformance, Whole Foods is finally looking healthy again.
Interestingly, the catalyst for WFM stock’s steep descent was the same as the catalyst for its sharp recovery — earnings. The swan dive from May along with last month’s surge were both driven by an earnings release, illustrating once again the significance of these quarterly rituals.
Meanwhile, the price chart of WFM stock is littered with bullish signs.
Higher pivot lows signal an increased aggression by dip-buyers. The unwillingness to give back any of the post-earnings gains from November is a plus as well. WFM is some $14 off its lows and has yet to stage any type of deep pullback. Volume patterns look great, and yesterday’s breakout kicked off WFM’s next advance.
How to Trade WFM Stock
Traders expecting more upside in Whole Foods could buy a Feb $50/$55 call spread for $1.80 or better. Think of it this way: You’re buying the Feb $50 call as a bullish bet, but to partially finance the call purchase, you will sell the Feb $55 call.
By shorting the higher-strike call, we will cap our reward if WFM climbs above $55, but the odds of that happening by expiration are slim. The Feb $50 call can be purchased for $2.55 and the Feb $55 call can be sold for 75 cents, which reduces the cost of the trade by 30%.
The max risk is the initial debit of $1.80, while the max reward is the distance between strike prices minus the net debit, or $3.20.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.