By now you’ve heard that Amazon.com (AMZN) purchased Whole Food’s Market, Inc. (WFM) for $42 per share. That’s $13.7 billion!
This is the largest acquisition in AMZN’s history. And all the media heads right now are trying to figure out what exactly this means for the company – and the future of grocery stores altogether.
But while they’re sorting that out, I want to talk to you about something much more important – how to cash in on this historical deal.
And these are the best two ways to do it…
The “End of Grocery Stores” Marks the Beginning of Brand New Profit Opportunities
The days of sauntering into your local corner grocery store are just about to be a thing of the past. Sure, there’s still a very small percentage of “mom and pop” grocery stores scattered around here. In fact, most of the ones I see are near a local high school, where they can cater to kids’ appetites for soda, snacks, and candy. But as you’ve seen, even the “super” regional grocery stores, like Super Kroger, Super Valu, and Super Target, have experienced enough of challenges that have put a lot of pressure on their stock prices.
So when Jeff Bezos, founder and CEO of Amazon.com (AMZN), announced the buyout of Whole Foods Market, Inc. (WFM), it sent the entire grocery store sector reeling. The Kroger Co. (KR), for example had already reported less-than-stellar earnings and lowered their annual guidance by 10% before news of AMZN‘s announcement – with the stock clocking at $24.56 per share. And after the news broke, KR gapped down even further to $21.19 on the open. It continued trading lower during the day and subsequently closed a bit higher – but only marginally did it start to refill the downside gap.
Other retail grocers were down on the news, too, with Costco Wholesale Corporation (COST) trading down to 6.2%. And other major retailers that include built-in grocery stores, like Wal-Mart Stores, Inc. (WMT) and Target Corporation (TGT), were down 5.8% and 12%, respectively.
And this is only the beginning…
AMZN is going to keep putting pressure on these grocery retailers. The decline in price of these stocks on Friday alone is a telling sign that investors fear and anticipate the demise of grocery stores to the effect of retail brick and mortar stores.
But what’s bad for them is a huge moneymaking opportunity for us…
And these are the best two ways you can cash in:
- Consider Buying Calls on AMZN
Call options are a great way to play a stock you expect to keep climbing – which I think is safe to say
AMZN will do. When you use call options, you essentially get to “rent” 100 shares of the stock for much less than you’d pay to buy a single share of stock outright. As of the time of writing,
AMZN is trading at $997.11 – but you can buy a call option on the stock for even less than half that price.
And if you want to lower your cost even more, you can consider opening a bull call spread, which is when you buy a call option at a lower strike price while simultaneously selling a call option at a higher strike price (both options have the same expiration date). In the case of an in-the-money bull call spread, the calls that you sold at a higher strike price would normally get exercised, and the stock would normally get assigned to your account. However, since you also bought calls to hedge against the ones you sold -these should be exercised at the same time and at the same strike price.
And the best part…
Since there’s no transaction cost for this trade, your account is credited the amount of the spread (per contract) minus the cost of the calls you bought when you opened the trade (or the debit).
- Consider Buying Puts on Other Grocery Stores
You can cash in on the grim future of grocery stores and AMZN‘s likely continued pressure that will keep driving down their stock prices by buying put options. When you use put options, you get to “rent” 100 shares of the stock at a much lower cost – with much lower risk.
Of course, you’ll want to talk to your broker about which profit strategy would be best for you. But either option can put some real money in your pocket.
To your continued financial success…
Tom Gentile
