Despite liking the risk/reward of this trade, in order to justify putting it on I also need to like the underlying company. Whole Foods is a brand name I love but think its stock is a bit pricey to buy here. Currently Whole Foods trades at 4.4x book, 35.5 PE, and 1.4x sales. This is not an astronomically high valuation for a growth company, but certainly shows that the stock is not cheap. What I do like is that Whole Foods consistently posts higher gross margins (currently 36%) than its competitors like Safeway (27%) and Kroger (21%). The company also has a strong history of growth and offers a 0.9% dividend yield. The company’s growth has come from its ability to use free cash flow to open new stores in new markets. In doing so it has capitalized on the American trend of eating higher quality organic food and the willingness to pay a premium for it.
All in all I like Whole Foods but would not buy the stock without downside protection because of its full valuation at the moment. As a longer term investment I think Whole Foods has room to run and would be happy to capture a 16% return in a year. The 7% downside protection the call offers makes it easier to buy the stock at these levels and on a selloff I would look to accumulate a few more shares for the long term.