Name That Trade – $BBBY: Blood Bath and Beyond

by CC September 22, 2015 3:15 pm • Commentary

Up until yesterday’s weak data on existing home sales, and the reversal of many homebuilders in the last couple trading sessions, housing in the U.S. is perceived to be one of the brightspots in an otherwise mediocre, slow growth economy.  Shares of Lennar (LEN) have reversed nearly 9% from yesterday’s opening highs after reporting better than expected fiscal Q4 results prior to the open:

LEN ytd chart from Bloomberg
LEN ytd chart from Bloomberg

This action reinforces what has been clear in the U.S. stock market so far this week, investors are shooting first and asking questions later even for relative strength and absolute return winners in 2015. For evidence look no further than the two day, 8%, slide in the best performing sector, Biotechs.

But if investors are now selling winners in this market environment, why on earth would one take a shot on the long side in stocks that have under-performed the market leading into its recent correction?

Which leads me to Bed Bath and Beyond (BBBY), the home products retailer that is down 21% on the year, and down 27% from its all time high made in March of 2014. To say that BBBY has tracked the ups and downs of the U.S. housing recovery over the last 4 years is an understatement, gyrating between $55 and $80 since late 2011:

BBBY 5yr chart from Bloomberg
BBBY 5yr chart from Bloomberg

Event: BBBY is scheduled to report fiscal Q2 results Thursday after the close, the options market is implying about a 6% one day move on Friday, which is a tad rich to the 4 qtr avg move of about 5.3%, and in line with its long term average move of about 6%.

Vol Snapshot: Short dated options prices are trading above the levels of the prior 4 earnings reports, a reflection of the current vol environment, as well as risk into the event for a stock that has under-performed:

BBBY 1yr chart of 30 day at the money IV from Bloomberg
BBBY 1yr chart of 30 day at the money IV from Bloomberg

With vol this elevated, options strategies targeting the event should at the very least consider spreads and possibly short premium all together. Depending on your directional inclination, we might consider targeting the implied move and sell short dated options.

Hypothetical Trades:

Bearish: Buy the Sept 25th weekly/ October regular 55 put calendar for .35

This give you bang for your buck for a move towards 55 or even slightly lower with a vol differential between the weeklies and October options more than 2 to 1 (87 in weeklies vs 40) The most you can lose is .35 with a big move lower or a slight one higher.


Bullish: Buy the Sept25th/ October 65 call calendar for .25

Same thing here with not risking much to be there for a move higher, taking advantage of the implied vol difference. In both these calendars you are long fairly high vol in October but they are both dollar cheap so if you did get a move towards the strike in either direction you’d be in good shape to further spread the October options