How to Trade BBY Ahead of Best Buy Earnings

When big box electronics retailer Best Buy (BBY) steps into the earnings confessional ahead of the open Tuesday morning, it will be facing a cold retailing landscape.

Best Buy logo Best Buy stock BBY stockSo far, both Walmart (WMT) and Target (TGT) have lowered their sales forecasts for the coming quarter, raising concerns that Best Buy may follow suit. Add to this the fact that Best Buy remains in a transition as it looks to cut costs while generating private-label sales, and you have a potentially volatile situation for BBY stock.

Digging into the numbers, Wall Street is expecting Best Buy earnings of 31 cents per share. Meanwhile, revenue is seen arriving at $8.99 billion, down 3.3% from year-ago levels.

Best Buy Earnings Preview

Still, BBY has a history of topping the consensus estimate, with Zacks data indicating that Best Buy has only missed expectation once during the past two years, topping Wall Street’s targets in every other quarter.

As such, it should come as no surprise that reports a whisper number of 38 cents per share — 7 cents higher than the consensus. What’s more, the overall opinion from the brokerage community remains bullish, with Thomson/First Call data revealing 16 “buys,” eight “holds” and just two “sell” ratings for BBY stock.

That said, there is room for improvement, with the 12-month price target of $34 resting a mere 8.9% above BBY’s close at $31.20 on Friday. If Best Buy continues to show benefits from its turnaround efforts, price-target increases could be waiting in the wings.

Options traders are also firmly in the bullish camp for BBY stock. For instance, the put/call open interest ratio for the front two months of options arrives at 0.6, with call open interest easily outstripping put open interest. Zooming in to the soon-to-expire weekly Aug $30 options, we find an increased preference for BBY calls, as the weekly put/call open interest ratio falls to 0.52.

Peak call open interest in the weekly August 30 series resides at the $31 strike, totaling 11,337 contracts, while another 1,577 calls are open at the Aug $29 strike. On the put side, peak open interest totals 3,400 contracts at the deep out-of-the-money Aug $27.50 strike, with another 2,238 contracts open at the BBY Aug $29 strike.

Overall, weekly Aug $30 option implieds are pricing in a potential post-earnings move of about 7%. This places the upper bound near $33.45, while the lower bound lies at $29.05.

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The potential for a move above $33 has long-term implications for BBY stock, as the shares have met with resistance near $32 for the past several weeks. The $32 region also marks a 50% retracement of BBY’s January plunge, and could have significance for technical traders.

Options Trade on BBY Stock

Traders looking for a trade on BBY stock heading into earnings might want to consider siding with the bulls and opening up a Sep $31/$32.50 bull call spread.

This spread was last offered at 66 cents, or $66 per pair of contracts. Breakeven lies at $31.66 while a maximum profit of 84 cents, or $84 per pair of contracts, is possible if BBY closes at or above $32.50 when September options expire.

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

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