Best Buy Falls on December Margin Worries

Posted Jan 8th 2010 1:00PM by Brent Archer
Filed under: Major Movement, Bad News, Best Buy (BBY), Options, Technical Analysis

Best Buy (BBY - option chain) stock is trading lower today after the company announced this morning that its same-store sales rose 8.2 percent in December, topping analysts' forecasts of a 7.9 percent rise. However, shares of the stock are falling this morning after the company said it would not lift its earnings forecast, raising questions among some analysts about the strength of BBY's margins. 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.

This morning, BBY opened at $40.64. So far today the stock has hit a high of $40.86 and a low of $40.02. As of 12:05, BBY is trading at $40.09, down $1.45 (-3.5%). The chart for BBY looks neutral and S&P gives BBY a neutral 3 STARS (out of 5) hold ranking.

For a bearish hedged play on this stock, I would consider a March bear-call credit spread above the $46 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. For this particular trade, we will make a 7.0% return in ten weeks as long as BBY is below $46 at March expiration. Best Buy would have to rise by more than 14% before we would start to lose money. Learn more about this type of trade here.

BBY hasn't been above $45.55 at all in the past year and has shown resistance around $41.60 recently.

Brent Archer is an options analyst and writer at Investors Observer.

DISCLOSURE: Mr. Archer owns and/or controls diversified portfolios of long and short stock and option positions that may include holdings in companies he writes about. At publication time, Brent neither owns nor controls positions in BBY.

Tags: BBY, Best Buy, BestBuy, inthenews, options