Shortly after 1pm shares of Whole Foods (WFM) spiked 4.5% in a straight line as there were rumors on the Twitter (here) of a Walmart bid for WFM:
Traders quickly came to their senses, and the stock spent the next hour and a half re-tracing the whole move.
During the run up in the stock call option volume exploded, with nearly 8,000 of the Oct 30th 30.50 calls being bought and 2700 Nov 31 calls bought. The short term nature of the call buying highlights just how speculative the rumor was, with little conviction in duration and/or premium.
The next most active call on the day was 2500 of the Nov 35 calls, with 1700 being bought for 58 cents at 1:17pm when the stock was $30.75. While this trader was willing to give the trade some more time to play out, it’s important to note that these calls don’t break-even until $35.58, up 16% from current levels. So again, pretty speculative.
The next identifiable catalyst will be the company’s fiscal Q4 earnings report on November 4th after the close. Today’s volatility has caused short dated options prices to spike, with 30 day at the money implied volatility holding well above the 12 month highs at 51%. IV usually falls post earnings to the mid 20s:
The options market is pricing about a 10% move between now and next Friday’s close, which is basically in line with the average move following the last 4 earnings reports. The implied move for the next 6 trading days with earnings seems fair.
Back to the charts though, a quick look at the one year, and it is apparent that $30 is massive near term technical support:
And on a 10 year basis, $30 is that much more pronounced, with little support till $20:
The take-way is that while options prices are clearly elevated, the implied earnings move while high, may adequately reflect the potential for a large move in either direction.
Oh and one last thing, while consumers have become accustomed to WFM’s hefty prices at the register, investors have shunned the stock, down 40% on the year, down 54% from its all time highs made in late 2013. WFM’s PE is at a post financial crisis low with the stock trading at 17x fiscal 2016 eps that is expected to grow 6% on 7% sales growth.
Over the coming weeks/months I think we see $20 or $40, we will take another look prior to next week’s results with a hope that options prices settle a bit. Stay Tuned.