Wednesday, November 18, 2015

BBY Analysis

Update 11/19/2015: BBY reached 56% over its maximum potential profit immediately after earnings were published and I have exited to avoid further time risk.

Shares declined 4.2% over a day, or a -1,539% annual rate. The options position produced a 128.6% yield on debit for a +46,929% annual rte.

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

[BBY in Wikipedia]


I shall use the DEC series of options, which trades for the last time 30 days hence, on Dec. 18.


Implied volatility stands at 58%, which is 3.1 times the VIX, a measure of volatility of the S&P 500 index. BBY’s volatility stands in the 91st percentile of its annual range.

Ranges implied by options and earnings
WeekSD1 68.2%SD2 95%Earns
Implied volatility 1 and 2 standard deviations; maximum earns move

The Trade

On the chart, BBY has been in a downtrend since Sept. 18. Freely available analysis from Zacks Investment Research gives BBY a neutral rank of 3 with a negative 2.86% earnings surprise predictor. Prices the first trading day after earnings have tended to rise over the past year.

Analysts in aggregate give BBY a 19% enthusiasm index, with 56% of analysts covering recommending a strong buy.

So, a very mixed picture for BBY. I shall go with a neutral strategy but shall skew to the downside if the grid allows it in order to account for the chart trend.

Iron condor, short the $35 calls and long the $37 calls,
short the $26 puts and long the $24 puts,
sold for a credit and expiring Dec. 19.
Probability of expiring out-of-the-money


The premium is $0.48, which is 24% of the width of the position’s wings. The stock at the time of entry was priced at $31.11.

The risk/reward ratio is 3.2:1.

The zone of profit in the proposed trade covers a $4.50 move either way. The biggest immediate move after each of the past four earnings announcements was $3.68, and the average was $2.01.

Decision for My Account

I opened a position on BBY as described above.

-- Tim Bovee, Portland, Oregon, Nov. 18, 2015


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


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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.

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