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Best Buy Option Traders Bet On Continued Gains

BBY calls are flying off the shelves as buyout rumors swirl

by 12/13/2012 2:32 PM
Stocks quoted in this article:

Best Buy Co., Inc. (NYSE:BBY - 14.02) is being heavily targeted by options players in today's session. For a stock that's surged more than 15% higher today, calls have easily emerged as the options of choice. Around 99,000 calls have crossed the tape, representing nearly eight times their average intraday volume. Meanwhile, approximately 39,000 put contracts have changed hands, more than four times what is typically traded.

One of the more popular strikes of the day is BBY's January 2013 15 call, which has seen more than 12,000 contracts trade. A healthy portion of these have gone off at the ask price and volume is outpacing open interest, making it safe to assume that some of today's activity is of the buy-to-open variety. In order for these bets to be profitable by January expiration, the equity needs to find its way north of breakeven at $16.13 (the strike plus the volume-weighted average price [VWAP] of $1.13) over the next five weeks. This represents a 15% premium to current levels.

Widening the scope, today's tendency toward bullish bets has been standard of late. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), traders have bought to open 258 calls for every 100 puts during the past 10 sessions. This call/put volume ratio of 2.58 ranks higher than 87% of similar readings taken over the last year, indicating an accelerated preference for long calls over puts by option players in recent weeks.

This bullishly skewed bias is echoed in the stock's falling Schaeffer's put/call open interest ratio (SOIR). Since Nov. 19, BBY's SOIR has dropped to 0.59 from 0.68, as near-term call open interest jumped 29%. This ratio is now ranked in the 15th percentile of its annual range, implying short-term speculators are more call-heavy than usual toward the equity.

Technically, BBY has struggled on the charts for some time now. In addition to lagging the broader S&P 500 Index (SPX) by more than 30 percentage points during the past 60 sessions, the equity has shed 40% of its value year-to-date (even after today's spike higher). In light of this dismal showing, the recent uptick in call volume may represent short sellers picking up hedges against their bearish bets. Short interest rose 39% in the latest reporting period, and now accounts for 13.9% of BBY's available float.

However, as previously mentioned, the stock is soaring today after the Minneapolis Star-Tribune reported that the company's founder and largest shareholder Richard Shulze is expected to put forward a buyout bid by the end of the week. The newspaper speculated the amount of the fully financed offer will fall in the $5 billion-to-$6 billion range.

Despite today's pop, BBY is still staring at overhead resistance from its 40-day moving average. This trendline has served as a ceiling since mid-September, and could provide a short-term speed bump against any additional upside.


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