Sprouts Farmers Market has plummeted in anticipation of competition from Amazon.com, handing substantial gains to downside option traders.
Last Thursday, Investitute’s proprietary programs found that 1,500 September $25 puts were purchased for $1.40 to $1.60 against with shares at $23.68. Volume was well above the strike’s open interest of 640 contracts, indicating that this was fresh buying.
Today those puts traded as high as $5.20, an average profit just shy of 250 percent in just three sessions. The stock fell 15.8 percent in the same time frame, illustrating how quickly options can far outperform their underlying shares.
Long puts lock in the price where a stock can be sold no matter how far it might drop, gaining value in a selloff with the potential for significant leverage. The contracts can be purchased either as an outright bearish bet or a hedge on a long-stock position.
SFM dropped 9.71 percent to $19.72 today. The organic-grocery chain declined as Amazon completed its purchase of Whole Foods Market and slashed prices on a variety or products.