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Best Buy (BBY) is scheduled to unveil its fourth-quarter results Thursday morning, with analysts anticipating a profit of $1.85 per share -- little changed from the big box retailer's year-ago earnings of $1.82 per share. Best Buy has been hot-and-cold on the earnings front; during the past four quarters, the company has topped consensus bottom-line estimates twice, and fallen short on two other occasions.
Ahead of the quarterly report, one options player built a bullishly biased spread on BBY. Right after the opening bell Wednesday morning, the trader purchased 358 April 32 calls, and simultaneously sold 716 April 35 calls. In other words, two April 35 calls were sold for every one purchased April 32 call. This strategy is known as a ratio call spread, and it's typically used by traders who are bullish on the underlying equity -- but with a very specific upside target in mind.
The best-case scenario for this spread is for BBY to settle squarely at $35 upon April expiration. This will reap the maximum potential profit on the purchased April 32 call, while the sold April 35 calls can be left to expire worthless. However, since this position was opened for a net debit of about $0.63, the trader can profit as long as BBY settles anywhere between $32.63 and $35.
However, losses could be substantial if BBY moves north of $35 prior to April expiration. Since only half of the short April 35 calls are hedged by April 32 calls, the trader's losses will start to add up with each tick beyond the $35 level. On the other hand, risk is limited on a downside move in the shares, with the the trader's maximum loss capped at the initial net debit of $0.63.
Ahead of the earnings announcement, BBY is mired in a short-term downtrend. Since mid-January, the stock has been smacked consistently lower by resistance at its 10-day and 20-day moving averages, which are currently hovering between $31 and $32.
Elizabeth Harrow is a senior equities analyst and editor in the research department at Schaeffer's Investment Research.
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