WFM Analysis

Update 11/13/2015: I exited WFM with the profit at 58% of its maximum potential, avoiding further time risk.

Shares declined by 4.2% over nine days, or a -170% annual rate. The options position produced a +140.0% yield on debit, for a +5,678% annual rate.

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The organic foods grocery chain Whole Foods Market Inc. (WFM), headquartered in Austin, Texas, publishes earnings on Wednesday after the closing bell.

[WFM in Wikipedia]

WFM

I shall use the DEC series of options, which trades for the last time 44 days hence, on Dec. 18.

Ranges

Implied volatility stands at 55%, which is 3.7 times the VIX, a measure of volatility of the S&P 500 index. WFM’s volatility stands in the 92nd percentile of its annual range.

Ranges implied by options and earnings

Week	SD1 68.2%	SD2 95%	Earns
Upper	36.79	42.69	35.75
Lower	24.99	19.09	26.03
Gain/loss	19.1%	38.2%

Implied volatility 1 and 2 standard deviations; maximum earns move
The Trade

Picking a strategy for WFM is a complex matter.

First, the chart is aggressively bearish and has been for some time.

Click on chart to enlarge.

WFM 3 years weekly bars

Second, I rely on the Zacks Investment Research analysis of the likelihood of an earnings surprise. In this case, it is positive, approaching 3%.

Third, Zacks Rank, an outlook score that is broader than earnings surprise expectations, is 4, a bearish score on the five-level scale.

Fourth, I also look at how price reacted the first trading day following an announcement over the past year. In the case of WFM, its neutral. The price has risen post earnings as often as it has fallen.

As I say, ambiguous, but with a bearish cast. I shall structure the trade as an iron condor.

Iron condor, short the $35 calls and long the $36 calls,
short the $25 puts and long the $24 puts,
sold for a credit and expiring Dec. 19.
Probability of expiring out-of-the-money

DEC	Strike	OTM
Upper	35	80.8%
Lower	25	85.2%

The premium is $0.24, which is 24% of the width of the position’s wings. The risk/reward ratio is 2.7:1.

The zone of profit in the proposed trade covers a $5 move either way. The biggest immediate move after each of the past four earnings announcements was $4.86, and the average was $4.26.

The stock at the time of entry was priced at $30.71.

Decision for My Account

I've opened a position in WFM as described above.

I've skewed the iron condor to the downside, providing additional profit in the case of a decline and also widening the profit zone to encompass the maximum post-earnings move of the past year.

-- Tim Bovee, Portland, Oregon, Nov. 4, 2015

References

Tradecraft: Playing the odds to build winning stock market trades from options, a description of how I trade, can be read here.

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Disclaimer

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.

No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decisions for his or her own account, and take responsibility for the consequences.

License



All content on Tim Bovee, Private Trader by Timothy K. Bovee is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.

Based on a work at www.timbovee.com.