How to Trade Best Buy at Record Highs Ahead of Earnings

BBY stock - How to Trade Best Buy at Record Highs Ahead of Earnings

Source: Best Buy

Move over FAANG, retail is taking the lead. With strong back-to-school sales and the holiday shopping season just around the corner, many retail stocks are trading near record highs. What’s more, former Amazon (NASDAQ:AMZN) “showroom” Best Buy (NYSE:BBY) is among them.

Best Buy has been quite the turnaround story in the past three years. BBY stock has soared from lows near $20 back in early 2016 to its current perch just north of $80. Still, 2018 has seen this rally slow down a bit. BBY stock has bounced between support at $65 and resistance near $80 for the past six months. Market volatility hasn’t helped either.

BBY Stock

This week, however, BBY broke out above $80 and could be ready for the next leg higher in this comeback story. Driving the stock higher was news of Best Buy’s acquisition of a tech company focused on senior health care. Analysts loved the deal, noting that a shift into the growing healthcare market could ease pressure on slowing electronics sales for Best Buy.

There are a couple of short-term caveats to the bullish BBY stock case, however. First, the shares are on the verge of overbought territory following the market’s gushing over the healthcare tech acquisition. Second, Best Buy reports earnings on Tuesday next week.

By the numbers, Wall Street expects BBY earnings to rise 18.8% year-over-year to 82-cents-per-share. Revenue is seen gaining 3.7% to $9.27 billion. What’s more, EarningsWhispers.com reports a whisper number of 88-cents-per-share for Best Buy. Hitting this target could provide the boost BBY stock needs to firm up support in the $80 region and send the shares higher.

Outside the whisper number, analysts are quite bearish on Best Buy stock. According to Thomson/First Call, 18 of the 25 analysts following BBY rate the shares a “hold” or worse. Furthermore, the 12-month price target of $75.95 represents a discount to yesterday’s close. As you can see, there is plenty of room for potential upgrades or price-target increases that could bolster short-term buying activity.

Pessimism is also prevalent for BBY stock among short-term options traders. Currently, the Sept put/call open interest ratio arrives at 1.38, with puts easily outnumbering calls among front-month options.

Overall, September implied volatility is pricing in a potential post-earnings move of about 9.7% for BBY stock. This places the upper bound at $88.50, while the lower bound lies at $73.

Two Trades for BBY Stock

Call Spread: With confidence growing in the retail sector, and Best Buy taking steps to shore up its future, I’m inclined to bet on a continued rally from this momentum play. Traders looking for bullish trade on BBY stock might want to consider a Sept $82.50/$85 bull call spread.

At last check, this spread was offered at 72 cents, or $72-per-pair of contracts. Breakeven lies at $83.22, while a maximum profit of $1.78, or $178-per-pair of contracts, is possible if BBY stock closes at or above $85 when September options expire.

Puts Spread: On the other hand, BBY stock could see a sell-on-the-news event following earnings, especially in the wake this week’s acquisition rally. Traders looking to profit from a short-term decline should consider a Sept $78.50/$80 bear put spread.

At last check, this spread was offered at 64 cents, or $64-per-pair-of-contracts. Breakeven lies at $79.36, while a maximum profit of $1.86, or $186-per-pair-of-contracts, is possible if BBY stock closes at or below $78.50 when September options expire.

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


Article printed from InvestorPlace Media, https://investorplace.com/2018/08/trade-best-buy-bby-stock-ahead-of-earnings/.

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