What Options On Best Buy (BBY) Were Predicting

Bloomberg Radio presenters were falling over one another earlier Thursday morning to describe not the pre-market slide in shares of electronics retailer Best Buy (BBY), but the “cratering” of its stock price. Host Tom Keane described the slide as an “eight-standard deviation move” (see chart 4 at the end of this piece). Comparable holiday store sales disappointed and the turnaround strategy of its CEO Hubert Joly of creating in-store pods from key brand names failed to lure customers even as Best Buy kept on discounting prices. Its shares fell by around $11.00 or nearly 30% premarket in response to the communication from the company. So this situation falls perfectly into the “what are the chances of that happening?” category. For options traders that is a clinical question and one where we think we can shed some light. We took some screen shots to show the Probability Distribution based upon prevailing options prices as of Wednesday’s close to show the predicted likelihood of a fall of such magnitude.

The first chart uses Friday’s options (two days) expiration to show that options traders assigned ZERO chance of a plunge of such magnitude. Best they could do was to assign a 1.94% chance that shares would close on Friday in the range of $30-31.00. Chart 2 shows the next expiration date of Friday 24 January. At least this time options assigned some likelihood of the price closing between $27.50-30.00. In this case the chances were a mere 2.61%. Yet that price is still in excess of the current trading price.

Chart 3 displays the Feb 21 expiration – five weeks away. In this case the market assigned a 1.2% likelihood that shares will close at that time in the $26.00-27.00 range. Such powerful trading technology tools allow investors to imagine the possibilities and weigh them by the probabilities, as we like to say around here. If your trading view differs with that of the market, you might care to look at what option markets are implying.

Chart 1 – January 17 2014 Expiration

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Chart 2 – January 24 2014 Expiration

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Chart 3 – February 21 2014 Expiration

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Chart 4 – Best Buy shares slide

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About Andrew Wilkinson 1023 Articles

Affiliation: Interactive Brokers

Andrew Wilkinson is the senior market analyst at Interactive Brokers Group, where he provides daily commentary and analysis on U.S. equity options trading throughout the trading day. Andrew provides webinars designed to explain option-related trading scenarios covering futures, fixed income, forex and equities.

Interactive Brokers: Interactive Brokers offers direct market access to around 80 electronic global markets from a single account. Successful traders and investors understand that superior technology and lower trading costs can result in greater returns. For 32 years we have been building direct access trading technology that delivers real advantages to professionals worldwide. With consolidated equity capital of US $4.4 billion, IB and its affiliates exceed 1,000,000 trades per day. In addition, our prudent and conservative risk policies make Interactive Brokers a safe haven for your money. Discover some of the reasons why IB, the largest independent US broker/dealer, is the professional traders' and investors' choice.

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