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3 Black Friday Blue-Chip Options Trades

Holiday opportunities can be found in AMZN, WMT and BBY

By Joseph Hargett, InvestorPlace Contributor

With just hours left until the biggest shopping day of the year, retailers are gearing up to welcome droves of turkey-stuffed holiday shoppers.

Source: Flickr

While most retailers should see favorable year-over-year comparisons, there will be a few that blow past expectations, and a few left with lumps of coal in their stockings.

Either way, there are plenty of Black Friday opportunities for savvy traders, especially when it comes to options trading.

Today, we are going to take a look at upcoming opportunities in Walmart (WMT), Amazon (AMZN) and Best Buy (BBY).

Walmart (WMT)

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The sultan of sales, Walmart (WMT), has had a hard time coping with the current economic environment.

Specifically, its core customers are fighting with high unemployment, low wages and economic uncertainty across the board … and while you’d think that might actually drive sales at the low-cost retailer, those points have resulted in three consecutive quarters of same-store sales declines.

As a result, WMT was forced to lower its full-year earnings guidance during its third-quarter earnings report Nov. 14. Then, just a couple days ago, Walmart announced that CEO Mike Duke was being replaced by international chief Doug McMillon.

These issues haven’t deterred Wall Street, with WMT shares trading near all-time highs, just shy of the 80 level. This region has long been a thorn in Walmart’s side, firmly capping the stock on multiple occasions so far in 2013. What’s more, WMT stock currently is overbought following their recent run higher, leaving shares vulnerable to potential short-term selling pressure.

Given Walmart’s fragile short-term state, weaker-than-expected Black Friday sales figures could spell trouble for the shares. A short-term dip of about 2.5% to support at WMT’s 20-day moving average is certainly not out of the question. To take advantage of such a move, traders might want to consider a Jan 77.50/80 bear put spread.

At the close of trading Monday, this spread was offered at 85 cents, or $85 per pair of contracts. Breakeven lies at $79.15, while a maximum profit of $1.65 is possible if WMT closes at or below $77.50 when January options expire.

Amazon (AMZN)

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Amazon (AMZN) is riding the e-commerce wave.

According to data from the Commerce Department, e-commerce made up 5.9% of all retail sales in Q3, up from 5.2% a year ago and 1.8% in 2003. Additionally, ComScore is forecasting a 12%-15% increase in U.S. online sales for the current holiday season.

Combine this with Amazon’s recent deal with the U.S. Postal Service for Sunday deliveries for Prime members, and we have the makings of another impressive Black Friday/Cyber Monday for Amazon.

On the sentiment front, analysts are clearly jazzed about Amazon’s prospects, with the stock attracting a whopping 31 “buys,” 11 “holds” and no “sell” ratings. Options traders, meanwhile, are holding back, with AMZN’s November/December put/call open interest ratio arriving at 1 — indicating that an equal number of calls and puts are open in the November and December series of options.

This lack of enthusiasm from the options crowd could be general worry about the holiday shopping season, or it could be signs of investor profit taking following the stock’s recent run higher. From a technical perspective, AMZN is on the verge of overbought territory, but support looks firm in the $370-$375 region.

With AMZN recently breaking out above 375, we could see a brief lull before the stock resumes its uptrend — one powered by Black Friday sales figures. Traders looking to get in on this continued upside might want to consider a Jan 375/400 bull call spread.

At the close of trading on Monday this spread was asked at $9.85, or $985 per pair of contracts. Breakeven lies at $384.85, while a maximum profit of $15.15 is possible if AMZN closes at or above $400 when January options expire.

Best Buy (BBY)

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Finally, we come to our surprise pick of the day.

Best Buy (BBY) is coming fresh off a post-earnings beating that many on Wall Street believe is overdone. The company saw same-store sales increase year-over-year on the quarter, with earnings easily topping Wall Street’s estimates. But because Best Buy warned that margins could take a hit during the holidays due to price matching, the stock was punished.

But there are several factors working in Best Buy’s favor. Online sales are improving at a rapid clip, rising 15% during the most recent quarter, driven by an improved website and customer’s ability to order online and pick up in the store. Also, BBY is coming off strong product launches from next-gen gaming consoles: Sony’s (SNE) PS4 and Microsoft’s (MSFT) Xbox One. In fact, PS4s were sold out in several stores due to strong demand: Sony sold a record-breaking 1 million units in the first 24 hours.

Despite the company’s prospects, there isn’t much love on Wall Street for BBY stock. Nine of the 23 analysts following the stock rate it a “hold” or worse, while nearly 6.7% of the stock’s float (shares available for public trading) is sold short. There is a shift beginning, however, especially among short sellers, where BBY saw a 27% decline in short interest during the most recent reporting period.

Options activity could also be indicative of nervous short sellers. Currently, BBY sports a put/call ratio of 0.59 for the November/December series of options, with calls nearly doubling puts for this time frame. The Dec 49 is the most popular call strike, sporting 34,687 contracts, though this open interest was likely in existence prior to BBY’s earnings selloff. Still, the Dec 40, 43, and 45 all sport open interest in excess of 11,000 contracts, pointing toward growing optimism from traders or increased hedging from short sellers.

Technically, BBY is trading in oversold territory, with the shares bouncing off long-term support near $38. Best Buy stock is now looking to retake the 40 region, which is home to its rising 50-day moving average. A reclamation of this trendline should quell some investor fears and bolster buying support for BBY, and stronger-than-expected Black Friday sales could be just the catalyst for such a move.

Those looking to get in on the BBY rebound might want to consider a Jan 39/45 bull call spread. At the close on Monday, this spread was offered at $2.09, or $209 per pair of contracts. Breakeven lies at $41.09, while a maximum profit of $3.91 is possible if BBY closes at or above $45 when January options expire.

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

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