New Trade $BBY – No More Circuit City, But Fade City?

by Enis August 20, 2013 10:15 am • Commentary

BBY is now up around 200% from its low in December, and incredible run higher in less than 9 months.  And their numbers this morning were very good, so the stock opened up more than 10%.

But what’s interesting to me about BBY is that the expectations are starting to get quite high for a big-box retailer that was left for dead less than a year ago.  The stock trades at about 15x 2015 projected earnings, which is an eternity in a company that is still battling the secular headwinds of internet shopping taking away from the in-store experience.  

Anyways, we don’t like this name, and think the pop this morning is a good entry for a fade trade, mainly since there are likely a good number of long-term holders who are happy to get out around here:

[caption id="attachment_29450" align="alignnone" width="600"]BBY weekly chart, Courtesy of Bloomberg BBY weekly chart, Courtesy of Bloomberg[/caption]

So we’re going to play for a quick fade on this pop, taking advantage of reduced implied volatility post-earnings to do it:


TRADE: BBY ($33.90) Buy the Sept 34 put for 1.55

-Bought BBY Sept 34 Put for 1.55

Break-Even on Sept Expiration:

-Profit below 32.45

-Losses of up to 1.55 between 32.45 and 34, max loss of 1.55 above 34

Trade Rationale:  I will have a very quick trigger on this trade in either direction (take loss above 35 or take gain on a quick move lower).  Risk / reward on both short and long time frames sets up well for a fade trade.  I am keeping a very close eye on any rally towards the 35 level going forward.