It’s time to “check-out” of Whole Foods Market, Inc. (NASDAQ:WFM) stock, as a price check of WFM suggests traders should short Whole Foods stock using a bearish put spread. Allow me to explain.
Whole Foods has been through the ringer the past couple years and WFM stock has paid the price. In no particular order — price gouging, reduced guidance, increased competition and margin threats have added up to a tough environment for Whole Foods investors.
More recently, a bout of listeria and conjoined hysteria sank Whole Foods shares in June, just as Whole Foods appeared to be getting back on track.
Over the course of the past couple weeks, a warning from peer Sprouts Fresh Market Inc (NASDAQ:SFM), as well as the threat of food deflation, has colluded to produce an unhealthy price check of sorts for WFM stock.
WFM Daily Stock Chart
Expressing a modestly bullish or neutral view, the vertical captured the full credit. But with shares 7% lower, Whole Foods could be in deeper technical trouble.
During Monday’s session, WFM stock has tested February’s multi-year low of $28.07. The bad news is the likelihood of a successful hold appears weakened as it represents a fourth time Whole Foods has retreated back to multi-year lows.
In our view, multiple tests diminish the view that bullish investors are interested buyers at this price point. This bearish prognosis is supported by Whole Food’s relative weakness this year and its inability to rally in the face of the broader market hitting all-time-highs this summer.
Opening the Whole Foods Fridge to the Bears
Reviewing the Whole Foods options board, the WFM Nov $28/$26 bear put spread is attractive. With shares near $28.35 the limited risk vertical fetches 65 cents.
By paying 65 cents this bearish trader has the opportunity to profit up to $1.35, or in excess of 200%, if shares of Whole Foods move 8% lower to below the short $26 strike price at expiration.
If shares of Whole Foods fail to trade below today’s low in the coming weeks, the entire debit of 65 cents is at risk.
Bottom line, with plenty of time on the calendar and the spread reducing the premium rot associated with buying a standalone put option, this vertical is a healthier play for a bearish move in WFM stock.
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.