On July 12th we took a look at Best Buy (BBY) following a gap lower on the heels of Amazon announcing a possible competitor to Best Buy’s popular Geek Squad. We also detailed a trade to finance September calls by fading a slight rebound near term for further upside later. Here’s the trade and rationale, from July 12th:
BBY (53.65) Buy the July/Sept 55 call calendar for 2.25
- Sell 1 July 55 call at .40
- Buy 1 Sept 55 call for 2.65
Rationale – This trade works best of the stock is at or near 55 on July expiration (in 9 days). The ideal situation after that is to then roll the short leg of the calendar to August, and then eventually creating a very cheap Sept call or call spread once those expire as well. These calendars take some patience and trade management but they can be well worth the effort to avoid decay while looking out a few months for a move higher.
The July calls expired worthless and now the position is simply Sept calls, currently worth 3.10 (vs the 2.25 cost), and with the stock up today above strike, it’s a good time to spread those and further reduce cost.
vs 1 existing BBY (55) Sept 55 call for 2.25
- Sell to open the Aug 57.50 calls at .65
New Position – Long the BBY (55) Aug 57.50, Sept 55 diagonal call calendar for 1.60 (currently worth 2.45)
Rationale – This reduces risk by .65. The most that can be lost on this trade is now 1.60 (if the stock goes lower). The trade does best if the stock continues higher towards 57.50 by August expiration. If that occurs the position risk can be further reduced by rolling the Aug short calls to September, creating a very inexpensive (or even a credit) Sept call spread that would be in the money. The new short August call expires before the company’s earnings on August 29th. The September calls capture that earnings event, therefore continuing the trade as a calendar makes sense.