Tuesday, September 11, 2012

Bed Bath & Beyond (BBBY) - Earnings Vol Set to Rise to New High Off of Last Earnings Drop

BBBY is trading $69.49, up 1.1% with IV30™ up 1.3%. The LIVEVOL® Pro Summary is below.


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Bed Bath & Beyond Inc. is a chain of retail stores, operating under the names Bed Bath & Beyond (BBB), Christmas Tree Shops (CTS), Harmon and Harmon Face Values (Harmon) and buybuy BABY. In addition, the Company is a partner in a joint venture, which operates two stores in the Mexico City market under the name Home & More.

This is an elevated vol note, but with earnings approaching. But this one is... interesting...

Let's start with the Charts Tab (one year), below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

On the stock side we can see a nice one year return, with the price rising from $58.01 to now just under $70. But, focus on the last three earnings cycles (notated by the "E" icon). I've included the stock moves on those days below:

12-22-2011: The stock dropped from $61.43 to $57.58 (-6.3%)
4-5-2012: The stock rose from $66.23 to $71.85 (+8.5%)
6-21-2012: The stock dropped from $73.67 to $61.17 (-17.0%)

In other words, the stock has seen some abrupt moves over the last three quarters -- and the most recent quarter was a debacle. Here's a news snippet from that day:

Bed Bath & Beyond's shares tumbled a day after the home goods seller forecast weaker earnings than Wall Street expected as concern spread about the company's health in view of the wobbling economy.

The chain gave the disappointing outlook even as it announced better-than-expected first-quarter results. It told investors it was being forced to use more coupons to get people to shop, and that was hurting its profitability.

Source: AP via Yahoo! Finance; Bed Bath & Beyond's outlook sends stock plunging

Even after that news, the stock has rallied back, though not to the original level ($73.67).

On the vol side we start to see something quite interesting, IMHO. First, we can see how the implied is rising right now -- the next earnings release is due out on 9-19-2012 -- so inside this expiry. But, what really caught my attention was how the implied didn't get "very" high in the prior earnings cycles. In fact, before the recent move in the implied, the IV30™ never breached 40%. Now, granted,the long-term historical realized vol (HV180™) is just 33.86%, but, even before the most recent earnings announcement, this stock has gapped pretty abruptly. The 52 wk range in IV30™ is [19.81%, 43.89%], putting the current level in the 83rd percentile (annual).

As the earnings date approaches, the implied will rise (unless the news comes out early) and it's a reasonable bet that the IV30™ will breach its annual high. Keep in mind, once we get six trading days away from expiration, the weight of the front month essentially goes to zero.

Let's turn to the Skew Tab.

We can see a normally shaped skew across all three expiries -- rather pretty really. There is a monotonic vol rise from the back to the front due to the vol (earnings) event.

Finally, let's turn to the Options Tab, for completeness.

We can see that Sep is priced to 52.74% while Oct is priced to 34.90%. That's the vol diff from earnings. I do note some interesting calendar spreads as the implied seems to be reacting to the last earnings release move. Hmmm...

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