Analysis and Trade Ideas for Whole Foods Earnings

• Posted by Greg Harmon
• on July 29th, 2015

This analysis and the trade ideas were given to subscribers at 11am today.

Whole Foods, $WFM, set the standard for locally grown, and organic food. Now there are many copy cats trying to catch up. Tonight the company will report earnings after the market close. And it goes into the report with a mixed up view of store growth and new market segmentation towards a younger customer. The crowd sourced estimate in Estimize shows an expected 45 cents per share in line with Wall Street analysts, and revenues of $3.784 billion, above the Wall Street crowd.

The price and market action have told an interesting story the past year. A bottoming late 2104 led to a run higher, only to pullback and then drop precipitously after reporting May 6th. But since then the price has consolidated in a tight range near 40. Heading into earnings the 50 day SMA has reconnected with the price but the other SMA’s are well above.

The momentum indicators are showing some signs of strength, although that is not showing up in the stock as yet. The RSI is trending higher in steps, and into the bullish zone, while the MACD has been rising since mid May, but is trying to avoid a cross down today. A look at the Bollinger Bands® shows them flat and mildly expanding. No real clues from there as to a move higher or lower.

There is support from prior price history at 39.60 followed by 38.90 and then 36.40. There is resistance above is at 41.70 and 43.15 followed by a gap to fill to 47.20 and then 49.65. The average move following the last 6 earnings reports has been 9.15% or about $3.75 at current price levels. The stock also has moderate short interest at 5.7%.

Looking at the July 31 Expiry options chain, with 3 days until Expiry, shows the at-the-money Straddle pricing a $2.95 move following the report, quite a bit smaller than the historical. The implied volatility is high at 107% compared to the August options at 38%, so expect premiums for tomorrow to fall after the report. Open interest is larger on the Call side and focused from the 41 to 44.50 Strikes with the biggest at 42. on the Put side the largest open interest is at the 39 Strike below but there is good size at the 41 and 41.5 Strikes too.

Whole Foods, $WFM

Trade Idea 1: Buy the July 31 Expiry 41/42 Call Spread for 65 cents.

Trade Idea 2: Buy the July 31 Expiry 41/42 Call Spread and sell the July 31 Expiry 39 Put for 5 cents.

Trade Idea 3: Buy the July 31 Expiry/August 42 Call Calendar for $0.30.

Trade Idea 4: Buy the July 31 Expiry/August 42 Call Calendar and sell the July 31 Expiry 38 Put for free.

Trade Idea 5: Sell the July 31 Expiry 41/42 Strangle for a $2.50 credit.

#1 looks for a rise to at least 42. #2 looks for the same move higher but uses leverage to improve return, with risk of owning the stock under 39 Friday. #3 works for the longer term upside looking for large open interest at 42 to stall the price this week. if it runs then you will need to roll up to next week or an August Call Spread. #4, a Call Calendar Risk Reversal, adds leverage to #3 with a possible entry at 38 Friday. #5 is profitable on a close between 38.50 and 44.50 Friday. I like #2 or #4 best if you have margin to use, with #4 giving you more time so more options.

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