Retail stocks are on the move. My watchlist is littered with goodlookers in the industry worthy of your attention. One such beaut is Best Buy (NYSE:BBY), which galloped 2.1% higher Thursday. The rally brought Best Buy stock to the cusp of a critical price threshold. Allow me to chronicle its recent behavior and suggest an options trade if you’re looking to climb aboard.
It seems like just yesterday — it was 2012 — that investors were clamoring about the death of brick and mortar retailers. When the pessimism reached a fever pitch, BBY had fallen to a lowly $11.20. It even descended below its 2008 low, and that’s saying something about the level of doom that haunted the stock.
Like most fear spells this one delivered one heckuva buying opportunity. Since finally bottoming in late-2012, Best Buy stock is up 596%, beating the broader market by a country mile. And that brings us to today.
After tagging a new record at the beginning of the year, BBY stock became chop city. But its never-ending merry-go-round isn’t necessarily a bad thing. Like all good consolidation periods, the past seven months have allowed Best Buy stock to work through overbought pressures. For proof, look at how the sluggish 200-day moving average has now caught up.
All that remains is a decisive break above the $80 resistance zone to signal a new advance is upon us.
As with all potential breakout setups, spectators have two choices. One is anticipatory, the other reactionary. The first offers better prices but less confirmation. The second promises more confirmation but a worse price. As with all things in the trading realm, you must pick your poison. Those opting for the anticipatory tactic may enter bullish trades immediately. The reactionary route requires waiting until BBY shares eclipse the $80 ceiling before buying.
Two Ways to Play Best Buy Stock
To provide adequate time for retail stocks to run, let’s build a two-month bull call spread. Buy the Sep $80 call and sell the Sep $85 call for a net debit of $1.74. Consider this a bet that BBY can rise toward $85 by expiration. If it does, this vertical spread offers a potential $3.26 reward which translates into a 187% return on investment.
Admittedly, $85 is a lofty target so you might want to take profits or raise stops on a move toward $82.50. The risk is limited to the initial $1.74 cost and will be forfeited if Best Buy stocks sits below $80 at expiration.
As of this writing, Tyler Craig didn’t hold positions in any of the aforementioned securities. Want more education on how to trade? Check out his trading blog, Tales of a Technician.
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