Last week, (in fairly dramatic fashion!) I highlighted WFM’s one year chart and dubbed it the “Triangle of Death” (below). Last night, WFM competitor, The Fresh Market (TFM) reported results that were below consensus, citing the usual suspects as head-winds (weak consumer and harsh winter). Miraculously, the company was able to guide the full year above consensus. The one day chart (below) of TFM, shows the stock’s opening gap of 7% and then its subsequent melt-down (stock now down 9% from the morning highs). Seems like investors ain’t buying what TFM is selling today, gluten free or not.
Getting back to WFM’s horrible technical set up, I want to own puts for the company’s next identifiable event, which will be their fiscal Q2 results that are tentatively set for the first week of May.
Implied volatility in WFM is relatively low, far lower than I would have expected with the stock under-performing the broad market so much. The one year chart of the 30 day at the money implied vol (blue line below) shows this relative cheapness, especially when compared to the 30 day realized vol (white) which has picked up as late.
I want to target the $50 level, which from the chart below would be a massive breakdown, so I want to help finance the purchase of May puts, so here is the trade:
TRADE: WFM ($53.70) Buy the April/May 50 put calendar for .80
-Sell to open 1 April 50 put at .50
– Buy to open 1 May 50 put for 1.30
Break-Even on April Expiration:
-Profits are maximized at 50 on April expiration. Slight moves above and below that strike are also profitable with big moves higher or lower putting the structure at risk of losses on expiration.
-Max risk is .80
Rationale: Implied vol in May is fairly low for an earnings month. We’re selling April at a lower vol level but that is simply to finance the purchase of May and shouldn’t negatively effect the structure too much even if vol starts to pick up as May should outpace April in that event and the structure is net long vega (vol) so will do well in that circumstance.
Additionally, the structure should hold up decently if the stock goes higher or stays in range as April will decay at a faster rate with May’s earnings month holding its value better. If the stock was to break here and go towards 50 in the meantime, the slight net short delta will increase the closer we get to April expiration. The main risks to the trade are rapid movements up and down over the next month, either getting out of range towards the upside and having May decline on deltas that aren’t made up for in the Aprils or if the stock cratered and went too far through the 30 strike, turning the structure from a bearish one to a bullish one below 50.
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Original Post Feb 26th, 2014: Chart of the Day – $WFM’s Triangle of Death
When it comes to technical analysis, I consider myself a “hobbyist” of sorts. One of the first things that I learned in this business was recognizing patterns that geniuses before me had already defined. Every once in a while, when looking through a couple hundred stock charts daily, I like to come up with goofy names for patterns that I see. This morning, I am looking at probably one of the worst charts I have seen in a very long time, WFM.
The one year chart below is the newly coined Triangle of Death pattern that could only result in lower lows! Well maybe only, unless it breaks above the downtrend line 🙂
Obviously all of the genius technicians are going to tell me how stupid I am, how could I have missed the obvious head and shoulders top with the neckline at $50, ok I got that, but I like my thingy better. There is nothing bullish about the price action, any way you draw the lines, especially when you consider the S&P 500 back near all-time highs. WFM is one of the few retail stocks down on a day when the XRT (of which WFM is a component) is up nearly 2%.
The two year chart below gives a little more perspective and reinforces just how important the $50 support level is dating back to the May 2013 breakout to new all time highs. A break below would put that gap in jeopardy.
One more chart that I don’t have a name for is the 2 year chart of WFM’s 30 day at the money implied vol (IV). Implied vol in WFM is reaching a fairly low level despite the stock’s weakness:
As a result, premium is relatively cheap in WFM. The April 52.50 put is offered at around 1.45 (with stock at $53.35), which would break-even at 51.05, down about 4.3% A decent structure for someone who thinks the probability of a break below $50 is higher than options market makers currently have it priced.