Options trading on Best Buy Co. Inc. (BBY: sentiment, chart, options) has been on the rise as the company's earnings report draws near. Traders have shown a growing preference for the stock's calls recently. The International Securities Exchange (ISE) has reported 1.7 calls purchased to open for every one put purchased to open during the past two weeks. This ratio of calls to puts is higher than 85% of all those taken during the past year.
The Chicago Board Options Exchange (CBOE) has also seen a spike in call trading. The stock's ISE/CBOE 50-day call/put volume ratio comes in at 1.37, which is higher than 94% of all those taken during the past 12 months, pointing to a growing optimism.
What's more, BBY's Schaeffer's put/call open interest ratio comes in at 0.95, which is lower than 62% of all those taken during the past year. In other words, short-term options players have been more optimistic toward the shares only 38% of the time during the past year.
Drilling down on the stock's open interest configuration, we find that peak call open interest in the September series resides at the out-of-the-money 40 strike, with more than 22,000 contracts. This hefty accumulation of bullish bets could serve as a layer of options-related resistance during the near term. What's more, peak September put open interest sits at the deep-out-of-the-money 32.50 strike, with only 15,000 contracts. This leaves the shares vulnerable to a sharp drop before they find potential options-related support.
Options players aren't the only group optimistic about the security's prospects. Wall Street is also relatively smitten with the shares, as nine of the 17 analysts following BBY rate it a "buy" or better. This configuration leaves ample room for both upgrades and downgrades following the company's earnings report.
Meanwhile, short sellers have started to unload their bearish bets. During the past month, the number of BBY shares sold short has decreased by 19.9% to 21 million. This accumulation of bearish bets still accounts for more than 6% of the company's total float and is nearly four times the stock's average daily trading volume. A continued unwinding of these positions could fuel a nice rally.
Technically speaking, the stock is flat on the year, lagging behind the broad market. The security has stair-stepped higher since November, creating a series of higher lows, but it is now hitting resistance at the 40 level. This round-number level has capped the shares since March.
However, from a longer-term perspective, the equity has climbed above its 10-month and 20-month moving averages. In fact, BBY is poised to close its first month above both of these trendlines since December 2007.
The company is expected to report earnings on Tuesday, Sept. 15, with analysts expecting a profit of 42 cents per share. This estimate is down from the company's year-ago profit of 48 cents per share. Historically, the firm has surpassed the consensus estimate three times and missed once during the past four quarters.
Overall, traders should be wary of jumping on the stock ahead of earnings. The heavy call trading indicates that sentiment is extremely optimistic heading into the firm's earnings report. A lackluster report could shake loose these bulls, creating a fresh wave of selling pressure.
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