Strategies in Whole Foods Market (WFMI) before earnings

Whole Foods Market Inc. WFMI will report earnings after the market closes today. Analysts expect per-share results of 37 cents, which would be a 12-cent (48%) improvement from year-ago levels. WFMI has consistently surprised to the upside with its earnings reports, beating analysts’ estimates by an average of 4.8 cents in the past six reporting periods.

Implied volatility is elevated in Whole Foods ahead of this event. The at-the-money (39 strike), front-month straddle, for example, is currently priced at $3.70, which is 9.5% of strike. In other words, the options market thinks WFMI shares will be moving 9.5% – higher or lower – between now and August options expiration in less than three weeks. The implied volatility for both the 39 call and the 39 put is roughly 52%, compared with 30-day historical volatility of 38%.

Note that these are not buy/sell/hold recommendations, merely examples of various strategies for educational purposes. The prices are taken as of Monday’s close, when WFMI shares were trading at $38.93, up 96 cents on the day.

Bullish Option Strategy: Bull Call Spread

Investors who think WFMI may break to the upside could consider a bull call spread. The January 30/40 call spread (buying the January 2011 30 call, selling the 40 call) is currently priced at $6.40 per spread. The most an investor can lose, should WFMI be trading at or below $30 at expiration, is 100% of the premium paid.

Should WFMI be trading above $40 when the options expire, the spread will reach a maximum profit of $3.60, which is the difference in strike prices less the premium paid. Breakeven for this spread is $36.40, above which WFMI is currently trading. As long as WFMI is trading above $36.40 at expiration in 172 days, the spread will be profitable.

Whole Foods (WFMI) bull call spread

For more information on bull call spreads in general, check out our free webinar on the topic on August 10, when this strategy is dissected in the “Two Traders, One Strategy” series. And you can access past strategy webinars from our events page.

Neutral Option Strategy: Iron Butterfly

Think the options market is overreacting a bit, sending volatility skyward? Investors who think WFMI could stay range-bound for the next several weeks could consider an iron butterfly, which combines a short straddle and a long strangle.

A September-dated iron butterfly can be sold by shorting the September 39 straddle (selling both the September 39 call and put) for a net credit of $4.60 and simultaneously going long the September 34/44 strangle (buying the September 34 put and September 44 call) for a net debit of $1.30. The overall credit collected is $3.30.

The most an investor can make with this four-legged spread, if WFMI is trading right at $39 at expiration, is the credit of $3.30. The maximum loss, occurring if the shares are below $34 or above $44, is the difference between the short and long puts/calls minus the credit, or $1.70. Reward on risk is 194% in 46 days. Breakeven for this iron butterfly is $35.70 to the downside and $42.30 to the upside.

Whole Foods (WFMI) iron butterfly