Monday, January 13, 2014

Best Buy (BBY) - Option Market: Huge Risk in Next 4 Days

BBY closed Monday trading at $36.86, down 2.5% with IV30™ up 4.0%. The LIVEVOL® Pro Summary is below.

Provided by Livevol

Update 1-14-2014:
Quick note that the vol difference between the font two months has exploded even further, see the image below from 1-14-2014 (the rest of this article was published 1-13-2014). Check out Jan vs Feb vol, below.

Provided by Livevol

Best Buy Co., Inc. is a multinational retailer of consumer electronics, computing and mobile phone products, entertainment products, appliances and related services.

The stock just came up on a real-time custom scan. This one hunts for calendar spreads between the front two months.  I know we're four trading days away from expiry, but this is an incredible volatility phenomenon in my opinion.

Custom Scan Details
Stock Price GTE $5
Sigma1 - Sigma2 GTE 8
Average Option Volume GTE 1,000
Industry isNot Bio-tech
Days After Earnings GTE 5 LTE 70
Sigma1, Sigma2 GTE 1

Let's jump right into it by  looking to the Skew Tab (below).

Provided by Livevol

We can see how elevated those Jan options are (4 day options) relative to Feb (with respect to volatility).  Without looking up a single news search, I can tell you that the option market reflects a high likelihood of news/announcement/something before the end of trading this Friday.  We'll look how elevated the vol is in Jan in a sec, but first...

We can turn to the Charts Tab (below). The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

Provided by Livevol

BBY stock has recovered incredibly well from what actually looked like a risk of insolvency at one point.  This was an $11 stock a little ore than a year ago and just a couple of months ago it traded as high as $44.48.  Whoa...

The 30-day implied volatility tells a fairly calm story, believe it or not.  Let's turn to a two-year IV30™ chart in isolation, below.

Provided by Livevol

We can see those highs in the vol as the stock was making the lows.  Since then, however, the volatility has slowly dissipated, reflecting less risk as expressed by the option market while the stock rose ~300%.  So why the article today?...

It ain't the 30-day vol that I'm looking at.  It's the four day vol.  Check out the Options Tab (below).

Provided by Livevol

Across the top in the green numbers we can see Jan is priced to 94% while Feb is priced to 44%.  Just look at a few of the actual options in Jan.   The $39.5 strike calls are priced at over $0.50.  The $34 strike puts are priced over $0.40.  In fact, the $41.5 strike class (not pictured here) are worth $0.20 and the Jan $30 strike puts are still bid.  What?...

We'll see in a few days if the option market is in fact right... Right now it reads: "huge risk in a few days."

This is trade analysis, not a recommendation.

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  1. It looks like earnings aren't until late February...any indication what is being priced in? A preannouncement? Was thinking about a short 1x ATM Jan straddle long 2x OTM Feb strangle for small debit, thanks for pointing out.

  2. Thanks for the note bosco. I'm about to put a position on too, trying to find the strikes I like.

  3. For your information holiday sales numbers comes out on Thursday not sure how you can not know that from their website up coming event...

  4. yup. It had to be a sales figure., no surprise there. AS I wrote:
    "Without looking up a single news search, I can tell you that the option market reflects a high likelihood of news/announcement/something before the end of trading this Friday."

  5. Holiday "revenue" number came out on the 11th flat (12.8b vs 12.9b last year). In that case if the revenue were flat, with all the discounts hurting the margin I feel bby will see a drop similar to SHLD and GME when it releases the sales numbers on Thursday. But then it is BBY so you will never know.

  6. It feels like we should be bearish given all the retail news, but then again, hat news is known, so the expectations are lowered.. no a "not so god number" could be seen as very good. This is a coin flip in my opinion, not bc of the numbers, b/c the reaction to those numbers.

  7. Oh der Gawd, Ophir, you caught my attention with this on Monday afternoon, after making a nice $2k profit on $YELP's monday tumble.
    i looked at your option tables and tried to study them to figure out what the "RISK" was. I incorrectly guessed that the option traders were selling Jan 18 $38 calls based on what i thought was a very large volume. so i sold 10 calls in my virtual trading acct to see what would happen. But i was not experienced with selling calls (which is why i did v trading), i had more experience buying puts in anticipation of the market going down. so i also put 10 puts at $37 in my vtrad acct. wednesday, no big movements, so i didn't pay attention thursday am, until 11:30 i casually logged into my account and saw my PUTS had made me over $8,000 ! i was so excited, then so depressed bcuz it was only virtual. but anyway, now i will carefully read your blog more, and continue to learn more about options. if i was diligent, i would have also come back here and read the comment by anon on jan 14 as 12:32 pm, and i would have known what was coming, and i would have REALLY bought some puts. oh well i will learn!