BBY Analysis

Update 9/7/2016: BBY gapped upward above its zone of profit and despite a gentle decline remained in unprofitable territory. I sold to avoid the likelihood of assignment of this in-the-money position prior to ex-dividend date on Sept. 9.

Shares rose by 1.95% over 16 days, all of it in one day, or a +45% annual rate. The options position produced a -59.2% loss on debit for a -1,351% annual rate.

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The consumer electronics retailer Best Buy Co. Inc. (BBY), headquartered in Richfield, Minnesota, publishes earnings on Tuesday before the opening bell.

[BBY in Wikipedia]

BBY

I shall use the OCT series of options, which trades for the last time 60 days hence, on Oct. 21.

Ranges

Implied volatility stands at 39%, which is 3.2 times the VIX, a measure of volatility of the S&P 500 index. BBY’s volatility stands in the 44th percentile of its annual range. The price used for analysis was $32.64.

Ranges implied by options and earnings

Week	SD1 68.2%	SD2 95%	Earns
Upper	37.86	43.08	34.25
Lower	27.42	22.20	31.03
Gain/loss	±$5.22	±$10.44	±$1.61

Implied volatility 1 and 2 standard deviations; central tendency earns move
The Trade

BBY has been moving in a sideways trend since March 12, ranging between about $29.35.

Brokers in aggregate give BBY a negative 43% enthusiasm rating, with 29% of 14 analysts issuing strong buy recommendations.

BBY has risen immediately after half of its last four earnings, stretching back a year.

I'll use a direction neutral strategy for my analysis.

Iron condor, short the $36 calls and long the $37 calls,
short the $29 puts and long the $28 puts,
sold for a credit and expiring Oct. 22.
Probability of expiring out-of-the-money

OCT	Strike	OTM
Upper	36	81.5%
Lower	28	76.3%

The premium is $0.31, which is 31% of the width of the position’s wings.

The risk/reward ratio is 2.2.

The zone of profit in the proposed trade covers a $4 move either way. The biggest immediate move after each of the past four earnings announcements was $2.98, and the average was $1.72 After eliminating the maximum and minimum post-earnings movements, the central tendency is $1.61.

Decision for My Account

I have entered a position on BBY as described above.  The stock at the time of entry was priced at $32.79.

-- Tim Bovee, Portland, Oregon, Aug. 22, 2016

References

Tradecraft: Playing the odds to build winning stock market trades from options, a description of how I trade, can be read here.


Elliott wave analysis tracks patterns in price movements. StockCharts has a good explainer. The principal practioner of Elliott wave analysis is Robert Prechter at Elliott Wave International. His book, Elliott Wave Principle, is a must-read for people interested in this form of analysis, as is his most recent publication, Visual Guide to Elliott Wave Trading. 

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Disclaimer

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.

No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decisions for his or her own account, and take responsibility for the consequences.

License



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Based on a work at www.timbovee.com.