Best Buy Options Bulls Bet On Another Earnings Breakout

BBY shorts are in cover mode ahead of earnings

May 23, 2018 at 11:45 AM
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Options bulls have been blasting Best Buy Co Inc (NYSE:BBY) ahead of the Amazon partner's first-quarter earnings report, due before tomorrow's open. BBY stock has history of volatile post-earnings moves to the upside, and call buyers appear to be betting on more of the same.

At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), for instance, BBY sports a top-heavy 10-day call/put volume ratio of 1.47, which ranks in the 85th percentile of its annual range. In other words, calls have been bought to open over puts at a faster-than-usual clip in recent weeks.

This call-skewed trading is being seen today, too, with 5,533 calls and 3,459 puts on the tape so far -- three times what's typically seen at this point in the day. Pre-earnings traders are targeting the weekly 5/25 82.50-strike call, which is likely being bought to open for a volume-weighted average price of $0.83. If this is the case, breakeven for the call buyers at this Friday's close is $83.33 (strike plus premium paid).

Looking at the charts, BBY hit a record high of $79.90 one week ago. While the shares have since pulled back amid sector-related headwinds -- namely yesterday's CEO-related sell-off for J C Penney (JCP) stock -- they appear to have found a footing near $75. This region is home to the equity's rising 32-day moving average, a 38.2% Fibonacci retracement of its surge from its March to the May peak, and its 10% year-to-date return.

best buy stock daily chart may 23

Plus, there's plenty of skepticism priced into the shares outside of the options pits ahead of earnings -- which could create tailwinds on a post-event rally. While short interest fell 15% in the most recent reporting period, there are still 25.76 million BBY shares sold short. This represents a healthy 10% of the stock's available float, or nine days' worth of pent-up buying demand, at the average pace of trading.

Elsewhere, 13 of the 17 analysts covering Best Buy stock maintain a "hold" or "strong sell" rating, while the average 12-month price target of $75.93 sits in line with current trading levels. This leaves the door wide open for post-earnings upgrades and/or price-target hikes on the big box retailer, which could draw more buyers to the table.

And while it's been a flip of the coin as to whether BBY stock closes higher in the session after the retailer reports over the past eight quarters, those four times the earnings reaction was positive resulted in an average next-day gain of 14.7%. This time around, the options market is pricing in a 12.5% swing in either direction for tomorrow's trading. A move of this magnitude to the upside would put Best Buy above $85, based on its present perch at $75.97.

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