Best Buy (BBY) - Earnings Preview, Patterns and Trades

Discussion in 'Options' started by livevol_ophir, Sep 13, 2010.

  1. livevol_ophir

    livevol_ophir ET Sponsor

    BBY is trading $34.46, up 1.7% with IV30&#8482 up 4.6%.

    <img src="http://2.bp.blogspot.com/_hMry1m7UF10/TI5waR00fVI/AAAAAAAAEts/wpomlu0WbdA/s1600/bby_summary.gif">

    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 (<a href="http://livevol.blogspot.com/2010/09/bby.html">in the article</a>).

    The front month vol is 78, the back month is 42. I have included the Skew Tab (<a href="http://livevol.blogspot.com/2010/09/bby.html">in the article</a>).

    <img src="http://3.bp.blogspot.com/_hMry1m7UF10/TI5wbXhBNQI/AAAAAAAAEt8/PnaBl7U1tuQ/s1600/bby_skew_9-13-2010.gif">

    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 (<a href="http://livevol.blogspot.com/2010/09/bby.html">in the article</a>) is included below.

    <b>Trade to Analyze</b>
    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.

    Details, trades, prices, vols, skews, charts here:
    http://livevol.blogspot.com/2010/09/bby.html

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