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Whole Foods Market (NASDAQ: WFMI) shares are falling after the company posted a second-quarter profit of $40 million, or 29 cents a share, below analysts' estimates of 30 cents per share. Growth has slowed for WFMI, which company executives are blaming on the slowing economy. If you think this stock won't be rising too far in the coming months, then it could be a good time to look at a bearish hedged play on WFMI.
After hitting a one-year high of $53.65 in October, the stock has hit a new one-year low today. This morning, WFMI opened at $30.17. So far today the stock has hit a low of $28.96 and a high of $30.21. As of 12:10, WFMI is trading at $29.37, down $4.27 (-12.7%). The chart for WFMI looks neutral and improving, while S&P gives the stock a positive 4 STARS (out of 5) buy rating.
For a bearish hedged play on this stock, I would consider an August bear-call credit spread above the $37 range. A bear-call credit spread is an options position that combines the purchase and sale of call options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make a 7.1% return in three months as long as WFMI is below $37 at August expiration. Whole Foods would have to rise by more than 26% before we would start to lose money. Learn more about this type of trade here.
WFMI hasn't been above $37 since February and has shown resistance around $35 recently. This trade could be risky if the company's next earnings (due out in early August) are a positive surprise, but even if that happens, this position could be protected by resistance WFMI might find around $35, where it has topped out twice in the past two months.
Brent Archer is an options analyst and writer at Investors Observer.
DISCLOSURE: Mr. Archer owns and/or controls diversified portfolios of long and short stock and option positions that may include holdings in companies he writes about. At publication time, Brent neither owns nor controls positions in WFMI.
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