Here’s a stock that may be worth looking at. It’s getting beat up pretty good after announcing third-quarter earnings. The author suggests a bull put spread. Take a look and see what you think.
The shares of big box electronics retailer Best Buy Inc. (BBY) are getting hammered in pre-market trading this morning. The stock has plunged more than 8% to trade just north of $25 in electronic trading as investors bail in the wake of a 13% drop in third-quarter earnings. What’s more, Best Buy said that it expects profit margins to fall by about half a percentage point in fiscal 2012, with same-store sales arriving flat to down 3%.
For the third quarter, Best Buy posted a profit of $154 million, or 42 cents per share, down from $217 million, or 54 cents per share, last year. Revenue rose to $12.01 billion from $11.89 billion a year ago. Analysts were expecting earnings of 52 cents per share on revenue of $12.13 billion.
Expectations were mixed heading into Best Buy’s quarterly report. According to data from Thomson/Reuters, the stock had attracted eight Buys, 15 holds, and one Sell rating. Additionally, BBY’s consensus 12-month price target rests at $29. Compared to BBY’s pre-market perch near $25.50, Wall Street analysts are forecasting an upside of about 13% during the next 12 months.
There was also a distinct lack of optimism from the options crowd ahead of the company’s quarterly report as well. In the December series, BBY has attracted total call open interest of 82,231 contracts, compared to put open interest of 60,802 contracts. The result is a very modestly bullish front-month put/call open interest ratio of 0.74, meaning that calls just barely outnumber puts in December.
This mediocre bullish outlook was mirrored in Tuesday’s options activity. Specifically, 37,362 puts traded on the stock, versus call volume of 45,956 contracts. Yesterday’s single-session put/call volume ratio arrived at 0.81.
Technically speaking, BBY was already in dire straits heading into this morning’s report. The stock’s rally off its October lows near $22 were stymied in mid-November when BBY ran smack into its descending 200-day moving average. The shares were ultimately rejected, and found support at their 50-day trendline.
This time around, however, BBY is set to open trading today sharply below former support at its 50-day trendline. Support should materialize near the $25 level, but BBY could be range-bound beneath the $26 level unless the stock can bounce back above its 50-day by the close this afternoon.
Daily BBY chart with 50-day and 200-day moving averages
Options traders looking for potential trading ideas in the wake of BBY’s earnings report may want to consider entering a bull put spread. This neutral to bullish strategy involves selling an out-of-the-money put, like the December 25 contract, while also buying a deeper out-of-the-money put, such as the December 24 contract, in order to limit any potential losses on the position.
According to the CBOE‘s website, this spread would have resulted in a net credit of about $0.08, or $8 per pair of contracts, after the close yesterday. The same strategy entered this morning should result in a considerably higher premium.
