Trade Update Nov 6th, 2012 at 3:30pm: A few weeks back, ytd winners were being sold en masse, possibly as investors feared a disappointing Q3 earning season, or possibly as mutual funds with Nov 1st fiscal year ends looked to lock in gains on big winners. WFM fit the bill, as similar former growth stories like CMG, PCLN, AAPL had recently falling prey to profit taking.
Here I am almost a month later, and 1 day prior to WFM’s fiscal Q4 earnings report and the stock is basically within 1% of where I initiated my bearish Put Fly. The problem for this trade is that I did not expect to have to make decision about the earnings announcement, this was a sentiment trade. The good news is that the Fly has not lost much value at all as the high strike that I am long (Nov 95 Puts) has stayed bid in vol terms despite the almost 30% decay of the actual premium, which has been offset but the decay of the two Nov 85 strike Puts that I am short. So after nearly a month, the position has lost very little value.
I am going to close the position for a small loss as my intention was never to turn this is into an earnings play. I have no opinion at the moment about their earnings.
Action: Sold to CloseWFM ($97.81) the Nov 95/85/75 Put Butterfly at 1.75 for a .10 loss.
Original Post Oct. 11th, 2012: New Trade WFM: YTD Winners Under Pressure, Who’s Next?
This may appear obvious, but there have been a handful of stocks doing a lot of the heavy lifting for a market that has defied gravity in the face of more than a handful economic headwinds, but buoyed by central banks intervention. We have largely tried to stay away from “fighting the fed” since mid Sept, but at this point, it seems that more than handful of stocks that have done much of the heavy lifting for the broad market are starting to see some distribution (AAPL, AMZN, EBAY, DIS, LEN, SBUX). We think this could become a bit of a trend, and possibly be exacerbated by any hiccups in earnings seasons. Names with high valuations and eye popping ytd performance (WFM & LULU) could be vulnerable to the sort of hits we have seen from names like PCLN & CMG on disappointments.
I want to take a look at WFM which is currently up 40% ytd, and only down 3% from all time highs, and set up for a defined risk bearish play heading into their fiscal Q3 report on Nov 7th
Fundamentals: WFM is a high-flyer that has seen significant multiple expansion over the past few years. It is a 40 P/E name with an expected growth rate around 20%, closer to names that trade 25-30 P/E. Here is the 5 year chart of WFM P/E:
Technicals: WFM’s chart shows a chart that went from a relatively stable uptrend into acceleration euphoria mode over the past year:
It has traded outside of that trend channel on the back of multiple expansion (as opposed to stellar earnings results), and the stock seems due for a pullback. Timing wise, the current price action has actually shown some weakness, as the stock is in the same place it was in June or July, while the market is 10% higher. Distribution also seems evident on the volume profile, indicating more weakness ahead.
The one year chart demonstrates the fairly steep trendline off of the 2011 lows, the support at 95 and the target range near the previous gap low right above the 200 day moving avg.
TRADE: WFM ($97.35) Bought the Nov 95/85/75 Put Butterfly for 1.85
-Bought 1 Nov 95 Put for 3.07
-Sold 2 Nov 85 Puts at .69 each for a total of 1.38
-Bought 1 Nov 75 Put for.16
Break-Even on Nov Expiration:
-Profits of up to 8.15 btwn 93.15 and 76.85, max gain of 8.15 at 85, pay off trails off btwn 85 and 76.85
-Losses of up to 1.85 btwn 93.15 and 95 and btwn 76.85 and 75, Max loss of 1.85 above 95 and below 75
**What I like about this trade is that I can make up to 8.15 in a very wide range (btwn 93.15 and 76.85).