Best Buy Option Traders See Slide Continuing

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Best Buy Option Traders See Slide Continuing

Best Buy Co., Inc.’s (BBY) stock price has been on the down ever since it dropped 12% the day following the publication of its most recent earnings report in late November. Investors reduced the price of Best Buy’s shares despite the company exceeding expert estimates because analysts were concerned about rising customer demand and hefty supply chain expenses. The recent market turbulence hasn’t given Best Buy stock a base from which it may swing upward.

On the surface, it seems like option traders are prepared for the share price of Best Buy to break its current negative trend. A closer examination of the Best Buy open interest’s finer points, however, provides a clearer picture. In addition, several characteristics of the implied volatility for Best Buy point to the market’s expectation of additional Best Buy declines in the near future.

A closer examination of recent open interest movements and the influence of implied volatility reveals that option traders are purchasing put options and selling calls, despite the fact that recent trading volumes for Best Buy first seem to be positive.

Key Takeaways

  • The price of Best Buy stock is still rapidly falling.
  • At first look, recent trade volumes seem optimistic, but closer examination of recent fluctuations in the open interest shows them to be bearish.
  • Best Buy’s stock price is still well below its 20-day moving average.
  • Support and resistance levels depending on volatility enable a greater move to the upside.

By evaluating recent option activity and share price action, chart watchers may acquire important information into the general opinion toward Best Buy stock. As of Tuesday, December 21, the chart below shows the most recent price movement for the Best Buy share price.

Chart Analysis

The figure shows the share price development for Best Buy over the last three months. One trading day is represented by each candle. The 20-day Keltner Channel indicators’ created the blue lines, which show price levels that are multiples of the average true fange (ATR) for the Best Buy stock. These lines illustrate a historical volatility range. An established technique for displaying historical volatility over time is the ATR. Following the earnings-based share price collapse, the outside bands of the historical volatility range broadened and now seem to be moving even more outward to the negative as the share price declines.

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The stock of Best Buy was showing a little negative trend on the left side of the chart and was trading under its 20-day moving average. Indicated with a red arrow, this. At the start of October, this trend changed direction. The green arrow emphasizes this rising tendency. This serves to emphasize how Best Buy stock climbed to the extreme highs of the volatility range, peaking at its 52-week high the day before the company released its November financial results.

The Best Buy stock has maintained a strong downward trend at the extreme bottom of the volatility range after falling 12% the day after reporting results. Blue is used to emphasize this tendency. It’s important to notice that Best Buy stock has not yet, even intraday, traded above its 20-day moving average.

The highest Best Buy share price in the previous month was $141.97, a 52-week high, in late November. The green balloon highlights this pricing. The red balloon indicates the lower share price throughout this period, which was $94.54 in mid-December.

Tip

A 20-day simple moving average, an upper and lower line, and a series of semi-parallel lines are shown by the Keltner Channel indicator. This channel indicator provides for a fantastic visualization tool for charting historical volatility since the higher lines are produced by adding a multiple of ATR to the average and the lower lines are drawn by subtracting a multiple of ATR from the average price.

Option Analysis

Recent Best Buy option trade volumes strongly favor calls over puts. On Tuesday, December 21, more over 8,000 calls than puts were exchanged. At first look, the fact that there are almost two times as many calls as puts is bullish. Trading volumes, however, only reveal a portion of the tale.

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The mood of option traders may be better understood by an examination of a stock’s open interest. Best Buy’s open interest at the moment is split 75,000 calls to 82,000 puts. Despite the very optimistic recent trading volumes, these open interest numbers show that option traders have a more balanced perspective of the share price of Best Buy. To get a better understanding of option traders’ attitudes, further examination of open interest numbers is necessary, just as it is with trading volumes.

There are more put options than call options in the open interest for January 21, the next monthly option expiry date. The $90 put with 4,400 open positions has the largest open interest of any single option. The current share price of Best Buy will drop by 7% as a result.

There are more puts than calls in the open interest for January 21 when at-the-money options and one strike in each direction up or down the option chain are taken into account. This is crucial to keep in mind since these strikes could represent more accurate price action based on current share prices than very out-of-the-money options, which can have their numbers distorted by speculators and option sellers receiving premium. The present figure conveys a pessimistic mood since there are far more puts than calls.

Option open interest is overall notably lower, even though it is somewhat bearish overall. The overall open interest has declined 34% over the last five days. During this time, the open interest in puts has reduced by 22%, but the open interest in calls has plummeted by 43%. This indicates that even if fewer option traders are ready to hold Best Buy options, put options are being purchased by more traders than call options. The put/call ratio, which has increased 36% over the last five days, reflects this.

Implied volatility is a crucial indicator of option trader attitude in open interest. Implied volatility shows that traders are selling calls and buying puts for options due on January 21. Because implied volatility is down but open interest is increasing for call options, it seems that traders are selling more contracts on short positions in the option. In contrast, the rise in open interest and growing implied volatility for put options show that traders are extending their long holdings in the option.

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It is useful to comprehend the idea of volatility skew while thinking about implied volatility. Volatility skew is a measurement of implied market volatility in both the upward and downward directions, as well as a comparison of how they relate to one another. The implied volatility skew at the moment is highly negative for Best Buy. Because option volatility for downside puts is sharply rising compared to implied volatility for upside calls, the market may be pricing in a greater concern of a move to the negative for Best Buy. The chart’s widening volatility bars are another visual indicator of this tilt.

The at-the-money options that expire on January 21 are shown in the chart below. The price for call options is shown by the green box, which indicates a 38% likelihood that Best Buy shares will close inside this range or higher by expiry. Put pricing is shown in the red box, with a 37% likelihood if prices decline by expiry.

The Bottom Line

Shares of Best Buy have decreased by 29.6% during the last month. A 12% one-day earnings-based share loss triggered the share price slide and ongoing negative trend. The short-term outlook for option traders is that the share price of Best Buy will continue to decline. That’s because the put call ratio has lately grown alarmingly, and the Best Buy put option open interest percentage is dropping more slowly than the call option open interest percentage.

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