New Trade $BBY – The BEST Buy?

by Enis April 30, 2013 10:23 am • Commentary

BBY is breaking out to new multiyear highs today on the news that it sold its European business to Carphone Warehouse.  This stock has been on an amazing run in 2013, more than doubling in a very short span of time.  

I did a quick fade-the-enthusiasm trade on BBY about a month ago, which I first entered because of very elevated call buying and an increasing momentum divergence.  Since it was a countertrend trade, I was quick to exit for a profit.

Today is a very similar setup, as the call to put ratio to start this morning is around 5 to 1 (and the 1 week average is around 2 to 1), while the stock has now rallied to an area where there is a lot of long-term overhead resistance (between 28 and 30):

[caption id="attachment_25354" align="alignnone" width="625"]5 year weekly chart of BBY, Courtesy of Bloomberg 5 year weekly chart of BBY, Courtesy of Bloomberg[/caption]

On the 1 year daily chart, it also now has an even lengthier RSI momentum divergence (shown by the red arrow), even as it makes a new high today:


[caption id="attachment_25355" align="alignnone" width="639"]BBY 1 year daily chart, Courtesy of Bloomberg BBY 1 year daily chart, Courtesy of Bloomberg[/caption]


The short interest in BBY has also declined to below 10% for the first time in more than a year.  The fundamentals are certainly improving, but how much of that is reflected in the stock’s enormous rally?  Not sure for the long-term, but in the short-term, I want to fade the euphoria:

TRADE: BBY ($26.70) Sold the May 26 / 28 Call Spread at $0.90

-Sold 1 May 26 Call at 1.50

-Bought 1 May 28 Call for 0.60

Break-Even on May Expiration:

Profits: Up to 0.90 between 26 and 26.90, max profit of 0.90 at 26 or below

Losses: Up to 1.10 btwn 26.90 and 28, max loss of 1.10 at 28 or above

Trade Rationale:  I think BBY is close to done going up, but I’m less sure on how quickly it will pullback, which is why I chose to sell a call spread as opposed to buy a put spread.  However, I’ll likely take this trade off on the first sharp move lower.