On Nov 30, I discussed in the article entitled “Volatility Squeeze in Whole Foods Market Inc. (WFMI)” why I had expected the shares of WFMI to go higher. It has done exactly that since then, trading now at 49.50.
Although I do expect WFMI shares to continue the ride, there might be some headwind when it reaches the psychological 50.00 mark. If you think that WFMI will trade right around 50.00 next Friday, Dec 17 (options expiration day), then you can put on a Dec 2010/Jan 2011 49/50 CALL Diagonal Spread (You buy the Jan 2011 49-strike CALL and you sell the Dec 2010 50-strike CALL against it)).
The whole idea behind this trade is that the near dated option (Dec 2010 50 CALL) will erode much faster than the further dated option (Jan 2011 49 CALL). The net Theta for this trade is therefore positive. The snapshot analysis shows that your break-even prices (at Dec 2010 expiry) are 48.78 and 52.39. Thus you make money in this trade if WFMI trades below 52.39 and above 48.78 by Dec 17, 2010. The trade makes maximum profit if WFMI is at 50.00 (the strike price chosen for the near-dated option).
Another way to look at this trade is that if WFMI trades below 50.00 strike price by Dec 17, the Dec 50 CALL that you are short will expire worthless. You will then have the Jan 49 CALL to participate in further upside in WFMI.