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Trader bets on turnaround for this beaten stock

It's been a tough year for Whole Foods investors. Shares of the organic grocer are down more than 40 percent year-to-date, making it the second-worst performing stock in the consumer staples sector, but some savvy traders sense a turnaround could be afoot.

The stock saw a sudden and sharp spike Thursday afternoon amid takeover rumors — shares rallied 4.5 percent after 1 p.m. EDT and then quickly retreated. The move sparked a flurry of bullish activity in the options market. "Call volume exploded during the short rally, reaching three times its daily average on the day," Dan Nathan told CNBC's "Fast Money" on Thursday.

Nathan noted that much of the trading that took place was in weekly options expirations, which indicated to him that many investors could be chasing rumors. Market participants have recently speculated that the specialty food retailer could be taken private. Shares of rival Fresh Market recently rallied after the company said it would conduct a strategic review of its business.

Read MoreCramer Remix: Time for this company to go private

However, there was one standout trade where someone bought 1,000 of the November 35-strike calls for 59 cents each. Since buying a call allows one to purchase a stock for a set price and time, this is a bullish bet that Whole Foods will rally to $35.59 or 18 percent by November expiration. The stock has not traded above that level since early August.

"Whole Foods does report earnings November 4 and the options market is pricing in about a 10 percent move by the end of next week," Nathan said. The founder of RiskReversal.com also noted that in the past year, the stock has gapped down following its earnings reports. While he doesn't necessarily agree with the direction of the trade, he did agree with using options to make a defined bet.

"If this thing misses and guides lower there is no support for the stock until about $20," said Nathan. "That being said, we are in a market where many stocks are being taken out or considering merging and that could put the stock back up near $40 very quickly," he added. "It makes sense to express directional views with options."

Read MoreThree stocks that almost always rise on earnings

Analysts polled by FactSet are expecting the company to post earnings of 35 cents per share on $3.4 billion in revenue when it reports after Wednesday's closing bell.

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  • Melissa Lee

    Melissa Lee is the host of CNBC's “Fast Money” and “Options Action.”

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