Retailers are getting beat silly this earnings season, with Target Corporation (TGT) the latest casualty. As a result, the situation looks grim for big-box retailer Best Buy Co Inc (BBY) and BBY stock as the company prepares to release its own quarterly report next Tuesday.
Expectations are already quite low for Best Buy’s report. Wall Street is expecting earnings to fall 5.4% year-over-year to 35 cents per share, with revenue off 3.1% at $8.29 billion. Still, there are some in the brokerage community who are looking for an earnings beat, with EarningsWhisper.com reporting a first-quarter whisper number of 38 cents per share.
As a whole, however, analysts remain quite bearish on BBY stock. According to Thomson/First Call, BBY has attracted nine buy ratings, compared to 12 holds and two sell ratings. That said, the TGT-driven selloff has created a cushion between BBY stock and the consensus price target of $34.44, which now represents a premium of 12% to the shares’ Wednesday close.
As bearish as analysts are, however, options traders have them beat in spades.
For instance, the current May/June put/call open interest ratio arrives at 2.99, with puts nearly tripling calls among near-term options.
The real pessimism surrounds Best Buy’s earnings report, however, with the weekly May 27 series put/call OI ratio coming in at a whopping 6.35.
Click to Enlarge Driving this outsized ratio are more than 22,000 puts open at the May 27 series $30 strike put, which closed with an ask of $1.25, or $125 per contract, on Wednesday. Peak call OI, on the other hand, pales in comparison, with 1,774 contracts open at the $32.50 strike.
Overall, weekly May 27 series options implieds are pricing in a potential post-earnings move of about 9.7% for BBY stock. This places the upper bound at $33.99, while the lower bound lies at $28.01. Technically, BBY is hovering just above key support at $30, while technical resistance emerges in the $34 region.
2 Trades for BBY Stock
Call Spread: With BBY stock trading near oversold levels following the Target beatdown, I’m inclined to bet on a post-earnings bounce — or at least a recovery rally heading into Best Buy’s quarterly report. Traders looking to bet against the grain on BBY stock might want to consider a June $32.55/$33.55 bull call spread.
At last check, this spread was offered at 30 cents, or $30 per pair of contracts. Breakeven lies at $32.85, while a maximum profit of 70 cents, or $70 per pair of contracts, is possible if BBY stock closes at or above $33.55 when June options expire.
Puts Spread: That said, guidance has not been kind to the retail sector, and BBY stock could still have some downside left if forward-looking numbers are weak. Traders looking to follow the bearish crowd on BBY stock might want to consider a June $28.55/$29.55 bear put spread.
At last check, this spread was offered at 35 cents, or $35 per pair of contracts. Breakeven lies at $29.20, while a maximum profit of 65 cents, or $65 per pair of contracts, is possible if BBY stock closes at or below $28.55 when June options expire.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
