Wednesday, November 16, 2016

BBY Analysis

The consumer electronics retailer Best Buy Co. Inc. (BBY), headquartered in Richfield, Minnesota, publishes earnings on 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. 16.


Implied volatility stands at 49%, which is 3.4 times the VIX, a measure of volatility of the S&P 500 index. NTAP’s volatility stands in the 69th percentile of its annual range. The price used for analysis was $39.71.

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

The Trade

BBY since 2013 has been executing a series of wide swings in a sideways correction within a downtrend that began in 2006.

The most recent swing, to the upside, began in January and is in its 4th wave, itself a sideways correction that began Aug. 24 within boundaries of about $37 and $40. It has stalled near the upward boundary in a 4th wave movement. Absent a breakout, the next movement would be to the downside.

Zacks Investment Research gives BBY a bullish rating with strong evidence that a positive earnings surprise is in the making.

Brokerages on balance have a negative view of BBY's prospects, coming down with a negative 47% enthusiasm rating. Only 27% of 15 analysts have issued strong buy recommendations.

BBY has risen only once the trading session after the last four earnings announcements.

It's a very mixed assessment, with no clear direction. I'll build a direction-neutral position but out of deference to Zacks' earnings surprise expectation, attempt to skew it a bit to the upside.

Iron condor, short the $45 calls and long the $46 calls,
short the $35 puts and long the $34 puts,
sold for a credit and expiring Dec. 17.
Probability of expiring out-of-the-money


The premium is $0.29, which is 29% of the width of the position’s wings.

The risk/reward ratio is 2.5:1.

The zone of profit in the proposed trade covers a $5 move either way. The biggest immediate move after each of the past four earnings announcements was $6.43, and the average was $2.13. After eliminating the maximum and minimum post-earnings movements, the central tendency is $0.71.

Decision for My Account

I placed an order on BBY as described above but was unable to get a fill at my asking price. The stock at the time of the order was priced at $39.81.

-- Tim Bovee, Portland, Oregon, Nov. 16, 2016


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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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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