After months of teetering about the $30 level, traders finally decided that Whole Foods ÃÛÌÒ´«Ã½, Inc. (NASDAQ:WFM) was too cheap. This is mostly due to the rumor mill of a buyout. It’s hard to short a stock under the looming threat of a positive headline. So there is an inherent put under Whole Foods stock.
Otherwise, from a technical perspective I would have bought July put spreads to catch a swing lower. It is technically vulnerable. If it loses $34.50 per share, it could fall another 4% from there.
From a trading perspective, I am willing and able to own WFM shares if they fall below $30 again, so I am prepared to risk a long trade for the next few months but that’s mostly because I can build in a big margin for safety. Otherwise, I’d have to wait for a better entry point. I’ve done this before as recently as this trade which delivered easy profits. Today’s trade is similar but on a different time frame.
Click to Enlarge Technically I like how WFM stock is holding the breakout from the channel that has plagued the shares since 2015. Fundamentally I am not a fan of Whole Foods’ financial metrics. Today’s write up is me betting on Wall Street’s perception of the stock. Meaning that I will trade WFM based on what the markets will value the stock not on what I think of it.
Perception of the masses is really what matters most.
The thesis for today’s trade is that WFM stock is likely to oscillate +/- 5% in the next few months depending on headlines, but it will eventually hold above the channel that it has been trading for months. And since I am willing to own the shares if the price falls more than 10%, I will generate income from selling downside risk against the fears of selloff.
WFM Stock Trade Idea
The Trade: Sell the WFM Jan 2018 $29 put and collect $1 per contract. I have an 80% theoretical certainty that I will retain maximum gains. But if prices fall below my strike, I will own the shares and accrue losses below $28.
I only sell naked puts if I am willing and able to own WFM stock. Otherwise, I use spreads instead.
The Safer Alternate: Sell the WFM Jan 2018 $29/$28 credit put spread. The safer aspect is not because it has a bigger buffer but rather because it has more finite risk profile. The spread still potentially delivers 20% yield. Compare this with buying the stock then hoping it rallies 20% just to match the performance of the spread.
Learn how to generate income from options . Nicolas Chahine is the managing director of . As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at and stocktwits at .
