Best Buy Co. Inc. (NYSE: BBY) stock is trading lower with the broader market today as investors continue to worry that the economy is headed towards a recession. The Institute for Supply Management reported this morning that its index on the service sector fell to 44.6 last month, indicating the first service sector contraction in over four years. Analysts had been expecting a month of growth. Since the service sector represents almost two-thirds of the American economy, investors are once again worried that the economy will sink into a recession, and have pulled many stocks, including BBY, lower today. If you think this stock won't be rising too far in the coming months, then it could be a good time to look at a bearish hedged play on BBY.After hitting a one-year low of $41.85 in August, the stock hit a one-year high of $53.90 in December. This morning, BBY opened at $47.69. So far today the stock has hit a low of $47.06 and a high of $47.94. As of 11:15, BBY is trading at $47.54, down $0.92 (-1.9%). The chart for BBY looks neutral and improving, while S&P gives the stock its highest 5 STARS (out of 5) strong buy rating.
For a bearish hedged play on this stock, I would consider a March bear-call credit spread above the $55 range. A bear-call credit spread is an options position that combines the purchase and sale of call options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. This particular trade will make an 8.7% return in seven weeks as long as BBY is below $55 at March expiration. Best Buy would have to rise by more than 15% before we would start to lose money.
BBY hasn't been above $54 at all in the past year and has shown resistance around $52 recently. This trade could be risky if the economy gets a boost from the economic stimulus package combined with interest rate cuts, but even if that happens, this position could be protected by resistance BBY might find around $54, where it topped out back in December.
Brent Archer is an options analyst and writer at Investors Observer. At publication time, Brent controls a bullish hedged positions in BBY. Both trades can expire profitably at the same time.
Struggling Playboy outsources business ops
J. Crew earnings preview: A strong Q3 all buttoned up?
Twitter to make acquisitions, generate revenue in 2010
