Holders of WFM: Not happy… (but we are)
By Paul Price of Market Shadows
Less than expected quarterly results and a reduction in guidance for FY 2014 (ends Sep. 25, 2014) led to a sharp drop in WFM. The stock breifly dipped as low as $50.32 this morning.
That puts WFM at a still-not-cheap, 31.5 times newly the midpoint of the downwardly revised current fiscal year estimates. It’s still a growth company and worthy of a premium multiple, though.
Market Shadows took a long-term view. We sold three contracts of the Jan. 2016, $40 strike price puts @ $3.50 per share.
Our ‘if exercised’ price drops all the way down to $36.50 ($40 striek – $3.50 put premium). That’s a level discounts a lot of bad news while providing a 27.5% margin of safety from today’s already beat-up price.
WFM hasn’t changed hands as cheaply as our break-even quote even once in more than two years.
Our maximum gain would occur if WFM remains above $40 through expiration date. We’d keep the $1,050 (300 x $3.50) without having to buy any shares. Our worst case scenario leaves us obligated to buy 300 WFM shares at a net cost well below today’s quote. We are willing to live with either result.
Follow this trade and all our other option positions in Market Shadows’ Virtual Put Writing Portfolio .
