Before you know the holidays will be here. I can almost hear the hustle and bustle already. This trade idea is on a company whose stores seem to be one of the more popular shopping destinations during the holidays: Best Buy (). If it works, BBY might be one of your favorite destinations too.
Best Buy (BBY –42.74): Put Credit Spread
The trade: Sell the BBY Nov 38/40 Put Credit Spread (selling the November 40 put and buying the November 38 put) for 30 cents or better.
The strategy: The maximum potential profit for this trade is 30 cents if BBY is trading above $40 at November expiration. The maximum loss is $1.70 (2 – 30 cents) if BBY stock is trading below $38 at November expiration. Breakeven is $39.70 at expiration based on a credit of 30 cents.
The rationale:
The BBY turnaround is nothing short of spectacular. The stock fell from around $44 late in 2010 to under $12 at the beginning of this year. But Best Buy has made an effort to control costs while becoming more competitive. The company has closed underperforming stores and has instituted a price-matching policy to prevent people from browsing the stores and buying elsewhere. In fact, one Barclays analyst is so convinced that this turnaround is working that he raised his to $50.
Click to EnlargeSpeaking of BBY stock, it is not hanging below $12 anymore. Instead, it is trading close to the level it was trading at back in 2010 thanks to a stellar 260% year-to-date run.
In fact, BBY stock has been on quite the bullish run for most of October. Over the last several sessions, it has been basing around $43.
That potential bullish base is the key for this trade idea to turn a profit. If Best Buy continues to base at that level or decides to break higher — which is a distinct possibility when a stock has refuses to move lower after a bullish run — the put premiums will decrease.
The bottom line is that it definitely looks like things have turned around at Best Buy … and this BBY trade idea might be the best option for traders.
As of this writing, John Kmiecik did not hold a position in any of the aforementioned securities. Get a.
