Thursday, July 28, 2011

Whole Foods Market (WFM) - Earnings Out, Skew Shape Changes

WFM is trading $66.53, up 1.7% with IV30™ down 30.7% as of ~10:50am EST. The LIVEVOL® Pro Summary is below.


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Whole Foods Market, Inc. (Whole Foods Market) is a natural and organic foods supermarket. The Company has one operating segment, natural and organic foods supermarkets.

WFM released earnings yesterday, AMC. Here’s a quick snippet that summarizes the results.

Whole Foods Market Inc. is reporting its third-quarter net income rose nearly 35 percent and raising its full-year forecast. The organic and natural grocery chain said Wednesday that it earned $88.5 million, or 50 cents per share, for the quarter. That's up from $65.7 million, or 38 cents per share, a year earlier. Its revenue rose 11 percent to $2.4 billion.

Analysts on average expected the company to earn 47 cents per share on revenue of $2.42 billion. Whole Foods credited the strong quarter to improving its array of lower-cost products and returning to its emphasis on health and wellness.
Source: AP

The vol crush is due to the earnings report, and the options are active. Over 11,000 contracts have traded in the first hour and a half on total daily average volume of just 3,713. Calls have traded on 1.5:1 ratio to puts, which is about average for the company. The Livevol® Pro Stats and Day’s Trades snaps are included below.

Let’s turn to the Charts Tab -- the top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20 - blue vs HV180 - pink).

We can see the stock has made a nice rise from the low/mid 50’s to now in the mid/upper 60’s. We can also see the monster vol crush today, but even after that dip, the implied is still trading above both the short-term and the long-term historical vols. Specifically:

IV30™: 31.85
HV20: 20.48
HV180: 28.86

Let’s turn to the Skew Tab to examine line-by-line and month-to-month vols.

We can see a normal looking skew curve for both months with respect to shape. What is interesting is where the two front months cross each other. The upside is more expensive in Sep and the downside is more expensive in Aug. It’s this discrepancy that caught my attention – specifically the vol diff between the front two months in the 50 strike.

Let’s turn to the Options Tab.

I wrote about this one for (OptionsProfits) so no specific trade analysis here. I can will say that the 43 (ish) vol in the Aug 55 puts feels expensive and covering with Sep is a possibility. But, I also note that the Sep puts are still priced at over 38 vol which substantially elevated to the historical vols (and yes, I do realize these are OTM puts). Makes that trade less enticing. Other trades on the board may be worth examining.

This is trade analysis, not a recommendation.

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