Options Update: Bears Bombard Best Buy with Heavy Put Volume
Despite the seemingly imminent demise, or at least severe crippling, of arch rival Circuit City
PowerRating) the shares of electronics retailer Best Buy
PowerRating) have fallen more than 11% since peaking near $29 per share late last week.
The stock was upgraded on October 31, with analysts forecasting potential benefits from CC’s troubles. But this news has quickly become old hat, and the stock’s subsequent technical weakness has sparked an onslaught of bearish speculation from options traders.
Specifically, more than 14,700 BBY puts have changed hands so far, outpacing the stock’s average daily put volume by a ratio of 5.5-to-1. This spike in put activity has also placed the shares on today’s Intraday Volume Explosion List. However, it was the more than 10,000 contracts that traded at BBY’s November 25 strike that >caught my eye today.
The Anatomy of a Best Buy Put Position
Diving into the options data, I noticed that nearly all of the BBY November 25 put volume traded at the ask price. Combine this data with the fact that volume at this front-month option exceeds open interest, and BBY is likely being targeted by heavy buy-to-open put activity. Running with the put-buying theme, it would appear that a trader purchased 8,000 BBY November 25 puts at 11:03 a.m. Eastern time for the ask price of $1.40. The total outlay for this position would be $1,120,000 — ($1.40 * 100)*8,0000 = $1,120,000. For this trade to reach breakeven, BBY would need to fall about 11.3% from yesterday’s close at $26.60 per share before the options expire on November 21. The maximum loss on this position is limited to the initial investment of $1,120,000.
By entering this trade, the investor is indicating that he expects BBY to fall sharply during the next several weeks. The shares have a good head start, slipping more than 3% so far today, but let’s see if the stock’s technical or sentiment backdrops provide any additional drivers for this trade.
While BBY has fallen more than 49% on a year-to-date basis, there are some short-term technical indicators that could create some serious problems for a November 25 put. Specifically, the stock is trading above former resistance at the 25.50 level – a region that held the shares in check from October 15 through October 31, and could now provide technical support for the equity. Meanwhile, BBY’s 10-day and 20-day moving averages are currently perched in the 25 area. Not only could these formerly oppressive trendlines provide a potential floor for the shares, but a bullish cross of this duo could signal short-term gains.
The Sentiment Drivers
On the sentiment front, BBY’s indicators are mixed, and remain far from favoring the type of short-term plunge needed for a November 25 put to reach profitability. On one hand, we have a wealth of optimism from options traders, as the stock’s Schaeffer’s put/call open interest ratio (SOIR) of 0.91 ranks below 79% of all those taken during the past year. However, there is a heavy accumulation of puts at the November 25 strike (about 7,000 contracts) that could provide options-related support for the equity as expiration nears.
The most direct threat to a November 25 put is the current analyst configuration on Wall Street. According to Zacks.com, 10 of the 16 brokerage firms following BBY rate the shares a “hold” or worse. With its chief rival seemingly going down in flames, BBY could benefit from upgrades as analysts lift their forecasts as a result of Circuit City’s decline.
While the struggling economy will certainly weigh on BBY’s bottom line, it seems unlikely, given the sentiment and technical indicators above, that the shares will drop below the 25 level prior to November 21. Wall Street is on track to suffer 2 rather large losses in as many days, and BBY has yet to be forced below key technical support levels. Now, I’m no Best Buy bull, and the shares may eventually crash through the 25 level, but the likelihood of such a development in such a short time seems very slim. In fact, with the shares holding firm amid the recent maelstrom, a November 25 put sell looks quite appealing right now.
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Copyright Schaeffer’s Investment Research. www.schaeffersresearch.com.