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Best Buy Traders Bet On 12-Year Lows

BBY investors bought newly front-month put options

by 11/19/2012 10:36 AM
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The shares of Best Buy Co., Inc. (NYSE:BBY - 14.15) are bouncing back from 10-year lows, though it appears a slew of options speculators are gambling on more short-term downside for the electronics retailer. During the course of Friday's session, BBY saw roughly 50,000 puts cross the tape -- about six times its average daily put volume, and more than double the number of BBY calls exchanged.

Attracting notable attention was the out-of-the-money December 11 put, which saw open interest increase by more than 3,600 contracts over the weekend. What's more, the majority of the puts changed hands at the ask price, hinting at buy-to-open activity.

By purchasing the puts to open, the buyers are expecting BBY to soon breach the $11 level for the first time in 12 years. More specifically, the volume-weighted average price of the puts was $0.49, meaning the buyers will profit if BBY slips beneath the $10.51 level (strike minus average premium paid) within the next few weeks -- which encompasses the company's turn in the earnings confessional tomorrow morning. However, even if BBY remains north of the strike, the traders' maximum risk is limited to the initial premium paid for the puts.

From a broader sentiment perspective, the preference for BBY puts marks a change of pace in the options arena. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock sports a 10-day call/put volume ratio of 2.10, indicating that traders have bought to open more than two BBY calls for every put during the past two weeks. Furthermore, this ratio stands higher than 80% of all others of the past year, pointing to a healthier-than-usual appetite for bullish bets of late.

It's worth noting, though, that short interest edged 1.7% higher during the most recent reporting period, and now accounts for more than 11% of the stock's total available float. In fact, at the security's average pace of trading, it would take about a week to buy back all of these bullish bets. Against this backdrop, it's possible that the growing affinity for long calls could be attributable to hedging activity among the shorts.

Meanwhile, the analyst crowd is also skeptical of BBY, with just one of 19 brokerage firms doling out a "buy" or better endorsement. Plus, just this morning UBS lowered its price target on the equity to $14.50 from $16.75. However, the pessimism isn't surprising, considering BBY has underperformed the broader S&P 500 Index (SPX) by nearly 20 percentage points during the past three months, and, as alluded to earlier, tagged a multi-year low of $13.52 just last week.

This morning, though, BBY has tacked on about 2.9% to flirt with the $14.15 level, thanks to reports that CEO Hubert Joly will meet with founder Richard Schulze -- the latter of which is considering a buyout bid for BBY -- later this week. In fact, Schulze needs to put forth a buyout offer soon, or else he'll need to wait until 2013. In August, Schulze said he could acquire Best Buy for $24 to $26 per share, or about $8.16 billion to $8.84 billion, but recent reports suggest the eventual bid could be lower.

Fundamentally, Best Buy has fallen short of Wall Street's per-share profit projections in one of the past two quarters, according to Thomson Reuters. For the third quarter, analysts are calling for a profit of 12 cents per share for the firm.


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