Today’s price action in WFM was a classic market situation where price moved first, and then market participants scrambled to assign a potential reason for the move. That led many traders to speculate that Carl Icahn was interested in the company, until that was later denied by a source close to Icahn, according to Yahoo Finance.
As the rumor spread, speculative traders were very active buying short-dated call options, and WFM volatility spiked today (the weekly 39 and 40 calls were the most active lines, trading over 5k and 4k, respectively). Even though the rumor has been debunked, implied volatility remains much higher today, as is common in situations like these where the call buyers don’t decide to sell out of their newly initiated positions, and decide to hold in the hopes of higher prices anyways.
Here is 30 day implied volatility in WFM:
Not a big move higher, from about 25 to 29 today, but realized volatility is starting to pick up, so today’s options buying might be the start of higher implied volatility in the coming week. Here is 10 day realized volatility:
This measure is at 35, and WFM has moved more than 2% on 4 of the past 6 sessions.
I bring all of this up to point out that options pricing looks too cheap for a stock that has declined 40% over the past 9 months, is trading near 2.5 year lows, and is widely followed due to its consumer appeal.
So back to today’s action – my personal opinion is that WFM hit buy stops when the stock broke above the 50 day moving average and last week’s pre-earnings highs:
The 50 day ma is not downward sloping for the first time since November, a potential sign that the long-term downtrend in WFM is at least due for a pause, if not a reversal. Regardless, traders have gotten excited by moves above the 50 day ma in the past few days. I’ll zoom on the recent price action to illustrate that point:
I’ve marked the 50 day ma around $38.80 with a red line. On July 30 and July 31, WFM saw higher than average volume (circled in green, lower panel) each time the stock crossed above the $38.80 level. Traders clearly had an eye on that level, and possible buy stops set above it. Well this morning, my guess is that some big buyers got involved shortly after the open, and finally triggered the many buy stocks that were set above the 50 day moving average, leading to a big volume move. Traders who were not involved probably started looking for a reason for the move, and out of nowhere, a new rumor was born.
While all of this is mere speculation on my part, I do think it’s helpful to put sharp moves into the proper fundamental and technical context. Recent options volumes have not been out of the ordinary, and few good fundamental reasons exist for activism in WFM. That’s why the technical explanation makes more sense to me.
In any case, I don’t have any position in WFM, and don’t plan on taking one in the near future. However, if implied volatility retraces most of today’s move higher, it might be interesting to look at as a pure long volatility situation, especially with the heightened focus on the stock after today’s rumors.