Best Buy Co., Inc. (BBY) shares have been declining since the business plunged 12% the day after its most recent earnings report was announced in late November. Despite exceeding analyst estimates, Best Buy stock fell as analysts voiced concern about customer demand and hefty supply chain expenses. The recent market volatility has not given a platform for Best Buy stock to rise.
At first sight, option traders seem to be positioning themselves for the Best Buy share price to reverse its recent downward trend. A closer look into the specifics of the Best Buy open interest, on the other hand, presents a clearer picture. Furthermore, characteristics of Best Buy implied volatility show that the market expects Best Buy to fall further in the near future.
While recent Best Buy trading volumes look optimistic at first sight, a closer examination of recent open interest movements and the effect of implied volatility reveals that option traders are buying put options and selling calls.
- Best Buy stock continues to fall sharply.
- At first sight, recent trade volumes look optimistic, but detailed details of recent swings in open interest appear gloomy.
- Best Buy’s stock price remains far below its 20-day moving average.
- Support and resistance levels depending on volatility allow for a greater move to the upside.
By combining an examination of recent option activity with technical analysis of share price movement, chart watchers may acquire significant information into the general attitude toward Best Buy stock. The chart below displays the most recent price activity for Best Buy as of Tuesday, December 21.
Best Buy’s share price activity over the last three months is seen in the chart. Every candle symbolizes a single trading day. The blue lines show a historical volatility range established by 20-day Keltner Channel indicators, which illustrate price levels that are a multiple of Best Buy stock’s average true fange (ATR). ATR is a common technique for displaying historical volatility over time. The outside bands of the historical volatility range broadened after the earnings-based share price decrease and look to be pushing farther to the downside as the share price falls.
Best Buy stock was in a slight negative trend on the left side of the chart, trading below its 20-day moving average. The red arrow emphasizes this. This tendency began to reverse in early October. The green arrow highlights this growing tendency. This highlights how Best Buy stock surged to the extreme highs of the volatility range, peaking with its 52-week high the day before results were released in late November.
Best Buy stock has continued in a severe downward trend at the extreme bottom of the volatility range after plunging 12% the day after releasing results. This pattern is denoted in blue. It’s worth noting that Best Buy stock has yet to move above its 20-day moving average, even on an intraday basis.
The highest Best Buy share price in the last month was $141.97, a 52-week high, in late November. The green balloon highlights this pricing. The lowest share price throughout this time period was $94.54 in mid-December, as shown by the red balloon.
The Keltner Channel indicator shows a series of semi-parallel lines based on a 20-day simple moving average, as well as an upper and lower line. This channel indicator is an effective visualization tool for charting historical volatility since the upper 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.
Recent Best Buy option trading volumes have favored calls over puts. On Tuesday, December 21, almost 8,000 calls were exchanged vs 4,100 puts. This is roughly twice the quantity of calls vs puts, which seems bullish at first sight. Trading volumes, however, only convey half of the tale.
An examination of a stock’s open interest might give further context for option traders’ opinion. Best Buy now has 75,000 calls against 82,000 puts in open interest. While recent trading volumes have been quite positive, these open interest numbers show that option traders have a more moderate perspective on Best Buy’s share price. However, open interest numbers, like trading volumes, need more study to give deeper insights into option trader attitude.
There are more put options in the open market than calls on January 21, the next monthly option expiry date. The $90 put has the most open interest, with 4,400 contracts. This indicates a 7% drop in Best Buy’s current share price.
There are more puts than calls in the open interest for Jan. 21 when at-the-money options and one strike in each direction up or down the option chain are considered. This is significant because these strikes may indicate more actual price action based on current share prices, as opposed to far out-of-the-money options, which may have figures distorted by speculators and option sellers receiving premium. The present ratio, which has considerably more puts than calls, indicates a pessimistic mood.
While overall open interest is marginally negative, option open interest is substantially lower. Total open interest has dropped 34% in the last five days. While put open interest has reduced by 22%, call open interest has plummeted by 43% over this time period. This suggests that, although fewer option traders are willing to hold Best Buy options, put options are being used by more traders than calls. The put/call ratio has grown 36% in the last five days as a result.
Implied volatility is a crucial indicator of option trader attitude in open interest. In the case of options expiring on January 21, implied volatility indicates that traders are selling calls and buying puts. This is because open interest in call options is increasing while implied volatility is decreasing, indicating that traders are selling more contracts on short positions in the option. Conversely, open interest in put options is increasing while implied volatility is increasing, suggesting that traders are adding to long bets in the option.
It is beneficial to understand volatility skew when discussing implied volatility. Volatility skew is a measure of market implied volatility to both the upside and downside, as well as how they relate to one another. Best Buy’s implied volatility skew is now quite pessimistic. This is because the implied volatility for downside puts is growing significantly compared to upward calls, indicating that the market is pricing in a greater fear of a Best Buy downturn. The widening volatility bars on the figure further highlight this skew.
The chart below depicts at-the-money options expiring on January 21. The green box shows the price offered by call option sellers, and it suggests a 38% chance that Best Buy shares will close inside this range or higher by expiry. The red box depicts the pricing for puts, with a 37% likelihood that prices will fall by expiry.
The Bottom Line
Best Buy’s stock has dropped 29.6% in the last month. A 12% single-day earnings-based share loss launched the share price slide and ongoing negative trend. Option traders seem to be positioning themselves for the Best Buy share price to decline more in the short future. This is due to the fact that the Best Buy put option open interest percentage is dropping more slowly than the call option open interest percentage, and the put call ratio has lately increased alarmingly.
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