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Will BBY Option Shorts Get Smoked?

Best Buy reported earnings this morning, and they beat and raised guidance. The stock is up over 6% in the premarket. Looking yesterday's straddle, the options market was pricing in about a 2 point move in BBY into options expiration, so we're seeing a little bit of a beat in terms of volatility.

Selling volatility into BBY earnings has been a profitable trade in the past. You can see the stats from LiveVolBlog about straddle sale performance. With a slight move outside of the expected range, essentially we see 2 scenarios:

  1. Market fades off and BBY starts to fill the gap, giving those that sold straddles a sigh of relief
  2. Retail sales are better than expected, providing fuel to the flames. Option shorts are then forced to cover, and then the market makers buy to hedge, exacerbating the short squeeze.

I can't predict the future but we will see how this acts within the first half hour of trading.

This move in BBY is very interesting, as it's the second retailer (LULU was the other) this week to beat and raise-- and noone was really expecting that sort of guidance. The retail sector really hasn't participated in the rally, so if it gets some legs there are some trading opportunities available in that sector for the next few weeks.

by Steven Place

Steven Place is the founder and head trader at investingwithoptions.com/