It is another beautiful Wednesday and I am primed up with another mid-week contrarian trade. Today, we will explore the options of Whole Foods Market, Inc. (NASDAQ:WFM). Whole Foods Markey currently occupies the position of the #6 most shorted NASDAQ 100 components.
Whole Foods Market with its market capitalization of $14.38B is a retailer of natural and organic foods. The company sells its natural and organic foods through a network of 362 stores in the United States, Canada and the United Kingdom.
Shares of Whole Foods Market are trading up 1.54% around $40.40 per share today. Today’s trading price marks a 60.19% discount to its 52-Week high of $64.72. However, the $40.40 trading price marks an 11.97% premium to its 52-Week low of $36.08. Hence, it is obvious that Whole Foods Market is trading closer to its 52-week low than its 52-week high.
Paying Attention to the Patterns
The chart above shows how shares of Whole Foods Market have been trading down south in the last one year. You will observe that the stock took a major plunge in May when it lost $10 to drop from a $48 share price to a $38 share price in just one day.
More interesting is the fact that the stock seems to have formed a double bottom (shown in green) price pattern. A double bottom price pattern is a simple yet innately bad pattern that can keep a stock stuck in a range for a long time. A double bottom price pattern will see a stock bottoming to a point, rallying up to a peak, falling back to that low point and then restarting the rally.
From the chart, you can see shares of Whole Foods Market dropping to a $36 low before rallying to a $40 resistance. The double bottom has been repeated again and the stock can either confirm or break the pattern based on how the fundamentals affect the investor perception of the stock. You can expect the stock to repeat the double bottom if stocks fail to break through the $40 resistance while a breakout above the $40 resistance will break the pattern.
A Potential Change in Fundamentals
Shares of Whole Foods Market are set for a possible change in market fundamentals today as the company is set to report its Q4 2014 earnings after market close today. Whole Food Markets has disappointed in two of the last four quarters; hence, the possibility of breaking down under the $40 resistance or breaking out above the line seems even.
However, the last EPS surprise of 5.14% on a 10% third quarter sales increase to a record $3.4 billion and net income of $151 million versus $142 million suggests that things are looking up for the company. In addition, we can gauge a more optimistic outlook in the CEO’s statement that
“Our business model is producing industry-leading sales per square foot, healthy returns on invested capital and strong operating cash flow. We are seeing signs of stability in our sales trends and believe our strategic initiatives will help generate further momentum and produce increasing returns on invested capital over the long term.”
How to Trade WFM Options
It might be smart to see if Whole Foods Market will deliver a strong quarterly result after the market opens today. However, I am buying now in anticipation that investors will push the rally above $40 tomorrow. I recommend buying the WFM Jan 2015 40.000 call (WFM150117C00040000) at an asking price of $2.24.
— Daily Option Alerts