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BBY Is on the Brink — Here’s How to Profit

Buy a very long-term put on the slowly collapsing Best Buy


Shares of Best Buy (NYSE:BBY) dropped 13% in Tuesday’s trading session as investors punished the consumer-electronics retailer for a disappointing Q3 earnings release, and are tacking on additional losses today.

The beleaguered big-box retailer reported a $10 million loss, or 3 cents per share, which was a far cry from the 13 cents per share analysts were expecting.

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Of course, the day-by-day demise of BBY has been an ongoing phenomenon easily identified in its price chart. Today’s debacle has simply sped up the decline. With Tuesday’s 13% downdraft and today’s continued fall, BBY has now shed more than half its value on the year.

Though there are problems aplenty for Best Buy, increased competition from Amazon (NASDAQ:AMZN) and other online retailers is perhaps one of the biggest. Smartphone-toting customers head to Best Buy to try out products firsthand, then use apps like Google (NASDAQ:GOOG) Shopper to quickly compare Best Buy’s prices to a number of other local and online competitors. Unfortunately for Best Buy, these savvy shoppers all too often leave the store empty-handed as better prices lure them elsewhere.

Suppose you think Best Buy’s ability to right the ship is nonexistent and it’s destined to go the way of the dodo bird. The options mart provides a variety of ways to capitalize on Best Buy’s potential rendezvous with zero.

The simplest — and most leveraged — bet one could make is simply buying a put option. The risk is limited to the initial debit paid and the reward is unlimited until the stock falls to zero.

The key to positioning oneself for the continued collapse in Best Buy is to buy enough time. Companies the size of BBY don’t generally go out of business overnight. So rather than buying an option that expires in a few months, you might consider buying a LEAPS option that doesn’t expire for over a year.

Traders could purchase the January 2014 10 strike put option for $2.20. Since it’s an out-of-the-money option, it offers a cheaper price tag, which helps generate a higher percentage return if BBY declines aggressively from current prices.

Given that BBY already has dropped so precipitously in the past week, traders might consider waiting for some type of oversold bounce before pulling the trigger on the put.

As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media,

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