Best Buy CEO Drama Inspires Options Traders

by Beth Gaston Moon | April 10, 2012 12:44 pm

Best Buy 300x199 Best Buy CEO Drama Inspires Options Traders[1]Best Buy (NYSE:BBY[2]) had a surprise for Wall Street today when it announced the resignation of CEO Brian Dunn[3], reportedly under a mutually accepted agreement. Dunn had held the top post at the electronics retailer for three years.

Initially, the stock shot higher on this news, jumping up to $23.74 from yesterday’s close of $22.65 (a move of 4.8%). After a very quick jaunt into positive territory, however, the stock made an about-face and is now off nearly 3% in early-afternoon trading. Year-to-date, the stock is down more than 5%, compared with the 8.6% rise the S&P 500 Index.

Options players have jumped on this news, trading 70,000 BBY options during the first half of the trading day. This compares to average daily options volume of under 18,000, according to IVolatility.

Volume is fairly evenly split, with 33,000 calls trading along with 37,000 puts. Call traders have zeroed in on front-month options. The most popular calls today are the 23-strike and 24-strike options, which have respectively seen 6,350 and 4,170 options change hands. Volume is slightly higher than existing open interest at both of these out-of-the-money strikes, so some (but not likely all) of this activity could result in new opening positions.

The 24-strike call has lost 18% of its value today, and the options are trading for an average price of nine cents per contract. The 23-strike call is down 32%, and the majority of these calls have traded for 25 cents apiece.

It’s possible some traders are bailing out of existing positions while others are making a cheap and aggressive bet that the stock will bounce higher before these options expire in less than two weeks. A long call buyer risks 100% of the premium paid but can enjoy unlimited profits if the underlying stock moves higher.

On the put side, traders have taken interest in the 22-strike options in the April, May, and June series. Specifically, 4,020 contracts have traded at the May 22 strike, 3,770 at the April 22 strike and 3,280 at the June 22 strike. All of these put strikes have open interest close to or higher than this volume, so we will have to wait for tomorrow morning’s open-interest translations to see if any of this is new activity.

It’s more likely that option players are taking profits off the table, as BBY puts have surged in value with the drop in the stock. For example, the April 22-strike put has gained 29 cents today and is currently bid at 68 cents, asked at 70 cents. A long put also risks the premium paid but has unlimited profit potential down to the zero mark. If traders had sold these puts, they may be opting to close them or roll them to a later options series to avoid having to buy the shares at the 22 strike.

Like some other bricks-and-mortar chains, Best Buy has struggled to keep up with the burgeoning online retail business in recent years. In late March, the company said it would shutter 50 of its stores[4]. . .but would open 100 smaller-scale locations. This decision followed several quarters of earnings disappointments.   

As of this writing, Beth Gaston Moon does not own any shares mentioned here. 

Endnotes:
  1. [Image]: http://investorplace.com/wp-content/uploads/2011/05/Best-Buy.jpg
  2. BBY: http://studio-5.financialcontent.com/investplace/quote?Symbol=BBY
  3. resignation of CEO Brian Dunn: http://investorplace.com/2012/04/best-buy-ceo-brian-dunn-resigns/
  4. would shutter 50 of its stores: http://investorplace.com/2012/03/best-buy-closing-50-stores-but-still-ignoring-customers/

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