Whole Foods (WFMI): Reviewing A Successful Double Calendar Spread Earnings Startegy

Whole Foods (WFMI) was set to report earnings on February 9th after the close and I had a good feeling it would continue its momentum from strong earnings last quarter, and also felt the options market was not pricing in enough volatility, seeing it as a stock that had consolidated with tight Bollinger Bands and ready to explode. I was closely following the options activity leading up to earnings and although more than 10,000 March $50 puts accumulated the action looked to be hedging as all the large blocks of stock were being bought right alongside. Also, I was seeing accumulation in May $60 calls, far OTM calls that are seeing a positive move coming. On a fundamental basis, shares do trade at a premium to other grocers, but they should with the growth and ability to pass on rising commodity costs to a more affluent customer base. The Street was also seriously under-estimating Whole Foods with most price targets sitting below $50. I now see shares as fairly valued, trading at the 10 year average P/E of about 33X. Same store sales rose at an impressive 9.1% in the quarter, and there is plenty of room for expansion going forward.

Directional bets can be dangerous on big earnings movers so I went with a more neutral strategy despite my positive inclinations. I decided to have my clients put on the February/March $60/$48 double calendar spread at $0.87, selling the February $60 calls and $48 puts to buy the March $60 calls and $48 puts. I chose these strikes because I felt these front month options were the most "juiced" with premium and was also my target moves for a beat/miss. The strategy is effective especially with less than a week left until options expiration when the front month IV is at a wide spread compared to the next month out.

Whole Foods delivered a stellar quarter and shares shot higher, reaching highs of $60.94 and settling Friday at $59.67 on the close. I decided to take profits mid-day on Thursday closing the spreads at $1.32, a 51.72% gain overnight. Not the biggest return, but a great execution of a neutral strategy and using options to effectively trade earnings.

A diagram of the original strategy P/L is below (ThinkorSwim Analyze Chart):



For a look at some of my recent earnings previews and along with option trading strategies, most of which were a resounding success, please visit (Scroll to Bottom of page): http://optionshawk.com/index_files/optiontrader.html