Monday, September 13, 2010

Best Buy (BBY) - Earnings Preview and Trades

* UPDATE: Disclosure - I sold a Sep strangle and bought a Sep strangle further OTM.

BBY is trading $34.46, up 1.7% with IV30™ up 4.6%. The LIVEVOL™ Pro Summary is below.

BBY has earnings out tomorrow before the bell.

For the last eight quarters a sale of the BBY ATM straddle the day before earnings and a purchase the day after has been a winner eight times in a row, with a minimum gain of 32.5% and a max gain of 70.7%. The stats I derived from Livevol Excel are included (click to enlarge).

The front month vol is 78, the back month is 42. I have included the Skew Tab (click to enlarge).

Note how much higher the red curve is to the other months. This is not a mistake of course, with just 4 days to go to expo, the earnings event creates a weighted average of vols that is substantially earnings (1/4 days). The vol should be much higher in Sep as it is.

I see the Sep 34 straddle priced at $2.30. The The Options Tab (click to enlarge) is included below.

Trade to Analyze
Sell 1 Sep 34 straddle @ $2.30
Let's see what happens on close tomorrow.

A few things to keep in mind.
1) Market feels bullish lately.
2) I believe this is a huge earnings release for BBY as they project the holiday season.

Some alternatives to naked straddle selling are:
1) Sell the Sep straddle, Buy the Oct straddle (though this is long vega)
2) Sell the Sep straddle buy the 31/37 strangle. This yields a $1.80 credit with protection to both sides.
3) Sell a 34/35 strangle, buy a 33/36 strangle (or something like that).
4) Forget all this analysis, maybe you want to make a bet on direction and buy a call spread or put spread.

This is trade analysis, not a recommendation.

* UPDATE: Disclosure - I sold a Sep strangle and bought a Sep strangle further OTM.

Legal Stuff:

No comments:

Post a Comment