Best Buy Options (BBY): Unusual Trading Activity

| August 22, 2012 | 0 Comments

BBY OptionsOptions on consumer electronics giant Best Buy (BBY) lit up our tracking system yesterday with a large amount of trading activity.

While the overall market bounced up and down yesterday, it was pretty much all negative for Best Buy.  The stock dropped on less than stellar second quarter earnings.

And now they’re facing other issues as well. 

Two big brokers have come out and downgraded this name. 

Wedbush downgraded the stock from Neutral to Underperform and lowered their price target to $14.50 a share.  The analyst cited Best Buy’s weak guidance and the new CEO’s lack of retail experience.  Jefferies also downgraded the shares from Buy to Hold.

As you probably know, Best Buy is the largest consumer electronics retailer in the US. 

Aided by the 2009 acquisition of 50% of Carphone Warehouse’s retail operations, the firm now controls around 7% of the $700 billion global consumer electronics market.

They also make money by selling warranties and by providing technical support through their iconic “Geek Squad”.

Nevertheless, Best Buy shares took a beating yesterday.   

The stock opened down 9.8% and quickly plummeted to a low of $16.25 a share.  That’s when option traders came out in force.  They placed trades that would suggest this could be the beginning of the end for Best Buy.

What did they do?

They jumped all over BBY put options. 

As soon as the earnings news broke yesterday, one trader came in and purchased 5,000 BBY January $10 strike put options.  He paid an average price of $0.20 a share for a total cost of $100,000.

Keep in mind, this trade is nothing more than a simple put purchase.  In other words, this trader believes Best Buy is going to decline even further in value.

And if he’s right, he stands to make a substantial amount of money. 

In fact, buying these options without pairing them with any other options leaves the trader with unlimited profit potential.

 Personally, I like this trade.  It’s a simple, inexpensive play on BBY’s hefty downside potential.

So, what’s wrong with the company?

On the surface, Best Buy seems like a strong company… but they’re actually facing significant headwinds.

For instance…

Mass merchants, warehouse clubs, and online retailers are all vying for electronics retail market share.  The increased competition will likely drive prices lower as well as limit margin expansion opportunities going forward.

In addition, Best Buy is having a difficult time usurping cable providers, iTunes, and Wal-Mart’s proprietary brands for a larger share of the direct-to-consumer media content distribution market.

Essentially, it comes down to this…

Best Buy’s having a tough time competing in the consumer electronics market.  The stock has broken down through three key support levels.  And option traders believe it’s going even lower.

I think that pretty much says it all.

For more detailed information on unusual options activity and how you can profit from it, be sure to sign-up for our daily newsletter, Options Trading Research.  It’s always 100% free and packed full of option trading ideas you can use immediately in your own portfolio.  Click here to subscribe for free.

Safe Trading,

Marcus Haber

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Category: Unusual Options Trading Activity

About the Author ()

Marcus Haber is the co-editor of Options Trading Research and boasts well over a decade of real-life options experience. Learning from some of the biggest names in the business, Marcus has served as an Options Strategist for a number of firms and was also appointed to the Options Advsiory Board with Pershing, a branch of the Bank of New York.