by John Kmiecik | October 25, 2013 9:17 am
Before you know the holidays will be here. I can almost hear the hustle and bustle already. This trade idea is on a company whose stores seem to be one of the more popular shopping destinations during the holidays: Best Buy (BBY). If it works, BBY might be one of your favorite destinations too.
The trade: Sell the BBY Nov 38/40 Put Credit Spread (selling the November 40 put and buying the November 38 put) for 30 cents or better.
The strategy: The maximum potential profit for this trade is 30 cents if BBY is trading above $40 at November expiration. The maximum loss is $1.70 (2 – 30 cents) if BBY stock is trading below $38 at November expiration. Breakeven is $39.70 at expiration based on a credit of 30 cents.
The rationale: The BBY turnaround is nothing short of spectacular. The stock fell from around $44 late in 2010 to under $12 at the beginning of this year. But Best Buy has made an effort to control costs while becoming more competitive. The company has closed underperforming stores and has instituted a price-matching policy to prevent people from browsing the stores and buying elsewhere. In fact, one Barclays analyst is so convinced that this turnaround is working that he raised his price target on BBY stock to $50.
Click to EnlargeSpeaking of BBY stock, it is not hanging below $12 anymore. Instead, it is trading close to the level it was trading at back in 2010 thanks to a stellar 260% year-to-date run.
In fact, BBY stock has been on quite the bullish run for most of October. Over the last several sessions, it has been basing around $43.
That potential bullish base is the key for this trade idea to turn a profit. If Best Buy continues to base at that level or decides to break higher — which is a distinct possibility when a stock has refuses to move lower after a bullish run — the put premiums will decrease.
The bottom line is that it definitely looks like things have turned around at Best Buy … and this BBY trade idea might be the best option for traders.
As of this writing, John Kmiecik did not hold a position in any of the aforementioned securities. Get afree trial of John’s live options trading room here.
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