Since making new all-time highs in November of last year, Whole Foods (WFM) is down about 41%, and down 33% in 2014 alone. While the chart of the stock looks a bit oversold on a one year basis (banging along the 52 week lows after four consecutive earnings/guidance disappointments) the stock is still up 230% from the five year lows:
On simple technical terms, the recent consolidation at the two year lows, with a declining 50 day moving average is far from attractive, and it would be foolish to ignore the massive relative under-performance to its peer group (consumer discretionary is around flat on the year) and to the broader market.
Earlier this month, we highlighted (WFM: Where Only Rumors are Artificial) some unusual options activity that corresponded with a spike in the stock as a result of some rumored interest of a noted activist investor (quickly denied), and the stock has given back all of those gains.
Looking at the vol market as a guide, market makers don’t seem to bothered by much as it relates to WFM. The chart below of the 30 day at the money IV (blue, prices of options) vs the 30 day realized (white, how much the stock is moving) clearly shows the expectation of low volatility over the next couple of months:
The fact that options are trading below the stock’s actual movement highlights this relative complacency despite the recent rumors.
The two year chart of WFM IV below shows the take it to the bank trend of IV reaching the mid to high 30s prior to an earnings event and the quick descent back to 20.
It is my sense that an acquisition of WFM would be very unlikely, but the combination of smaller players, or WFM as the acquirer, could be in the cards as there has been some consolidation among larger grocery store competitors. I would also note that activists could find the company to be under-levered as the company has $800 million in cash and no debt to speak of ($13 billion marker cap, or about 6.5%) .
I see the potential for more disappointing results greater than that of some sort of external event that would lift the shares sharply higher in the near term. However, a catalyst in either direction could make long options attractive given the low level of volatility.
One way of legging into an interesting structure is to start by buying a near the money strangle (long a put and call of different strikes in same expiration) in November:
Hypothetical Trade: WFM ($38.38) Buy the Nov 37.50 / 39 Strangle for 3.50
– Buy 1 Nov 39 call for 1.75
– Buy 1 Nov 37.50 put for 1.75
This structure obviously has decay and one would normally want to trade stock around it to alleviate some of that decay. However, the options also provide for a similar scalping option in that once the stock moves one way or the other from the strike, we can sell a call (if to the upside) or a put (if to the downside). Once that first option is sold against the straddle, the other side of the trade, completing the condor can be done on a reversal. This is basically legging into a condor with the intention that the sales of the options serve as scalping of stock movements away from strike.
This is not exactly our sort of trade, which is why we are not doing it, but it stuck out to us that the stock could be setting up for movement one way or the other and we thought this looked most interesting as Nov expiration will catch the next earnings event and the expected increase in vol should help offset decay.