Bed Bath and Beyond (BBBY) reports their fiscal Q4 results Wednesday after the close, the options market is implying about a 7% one day move which is essentially inline with the average over the last 4 quarters.
Yesterday there was an options trade in the stock that caught my eye that I wanted to take a few minutes to breakdown. When the stock was $77.45 a trader sold to open the April 10th weekly 81/73 strangle at $1.92 ($480,000 in premium) to open and bought 100,000 shares of stock. By selling the 81 call, and selling the 73 put the trader is essentially defining a range where he thinks the stock will be between on this Friday’s close.
Lets consider a few possible outcomes on Friday’s close:
1) Best Case: If the stock is between 77.45 and 81 on Friday’s close then the trader will receive all of the $480,000 in premium, as both the put and the call will expire worthless and have gains of the stock.
2) Worst Case: the stock is below 73 and the trader suffers losses of the 100,000 shares of stock and is obligated to buy 250,000 shares of stock at 73 given the sale of 2500 of the April 73 puts. But it is important to note that the 1.92, or $480,000 premium received will act as a buffer to the downside.
3. Not Worst Case, but not Great: the stock rockets above 81 (the short call strike) and the trader is obligated to sell 250,000 shares of stock at 81, but really at 82.92 (the call strike plus the premium received), up about 7% in line with the implied move. The trader is long at least 100,000 shares of stock, so the trade will be profitable to a point.
In Sum: Given the fact the trade was done tied to stock on a 40 delta, the trader is leaning long. My take is that the trader is comfortable buying a lot more stock down about 10% at 71.08 (short put strike less premium received), and happy to sell their shares at 82.92 (short call strike plus premium).
Looking at the one year chart below you can see the range over the last 5 months between $71 on the downside (green line) and the prior high just below $80. When you factor in the strikes chosen for the strangle sale and adding/subtracting the premium received it becomes obvious the trader betting on an inline move this week following earnings:
Oh and one last point, implied volatility, the price of options in BBBY are elevated into the print, reaching levels higher than where they were prior to the Q3 report in January and at 52 week highs, making vol sales against long stock attractive for those who do not think the stock will have an out-sized move: