Bed Bath & Beyond Inc. (NASDAQ:BBBY) is one of few survivors in the wake of the carnage that Amazon.com, Inc. (NASDAQ:AMZN) has caused over the past decade. Although the stock price action says otherwise, BBBY seems to have a niche that still has legs.
Maybe it was the large format 20% coupons that are in every Sunday paper I get. Or it’s just a habit to a batch of shoppers. Regardless, this may not continue for too long.
No, I am not calling for the death of BBBY’s business. But I am saying that I am not too optimistic about BBBY stock. Management reported earnings last night and Wall Street hated it. The stock is down 12% on the headline.
Fundamentally, BBBY is not expensive. It’s much cheaper, for example, than Macy’s Inc (NYSE:M), Nordstrom, Inc. (NYSE:JWN) and Target Corporation (NYSE:TGT). I can’t speak much about management, as they have a habit of missing earnings. This is evident in the analyst ratings where most are holds or lower.
BBBY also pays a dividend, but that is likely more of a liability than an asset to the stock price. If there is even a hint of a dividend cut then the stock will suffer greatly.
Click to Enlarge Technically, on this drop BBBY stock falls back into the clutches of a pivotal level that dates back 15 years. Usually these prove to be too important so bulls and bears are likely to fight over it thereby creating a stalemate. If this happens then selling premium into overblown fears could yield free income.
Most of the brick-and-mortar suffering is a direct result of the consumer shift to online shopping. This is the AMZN effect, but it’s really the whole online retailers that they are collectively causing the damage. This likely includes BBBY’s own cannibalization efforts.
Unfortunately, this online migration is accelerating so the problem can only grow bigger. But big dips are trade-able for the short term. So I recognize that this would be a trade that I won’t allow to turn into an investment in Bed Bath & Beyond shares. I just can’t bring myself to have faith in its fundamentals.
I usually like to sell naked puts for maximum impact but on this one I will have a tight stop. Sell the BBBY Nov $25 naked puts and collect 85 cents per contract to open.
For less aggressive traders, I would start with a credit spread instead. Then I can turn it into a naked put if I indeed see stabilization in the next few days.
The Alternate Trade: Sell the BBBY Nov $27.5/$25 credit put spread where the risk dollars are more limited. Yet if successful, the spread still can yield 35%. It is important to note that these are bullish trades but where I am not chasing upside targets.
All I need is for price to hold above long term support. Compare this with risking $30 to buy the shares and with no room for error hope for a 30% rally.
Selling options is risky business so I never risk more than I am willing to lose.
Learn how to generate income from options here. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernic and stocktwits at @racernic.
