Market News

August 1, 2014  Fri 4:14 AM CT

Trader repairs position in Best Buy

Best Buy started the year on a bad note, and one investor apparently wants to repair a losing trade.

optionMONSTER's Heat Seeker monitoring program yesterday detected the purchase of 10,000 September 32 calls for $0.99 and the sale of 20,000 September 35 calls for $0.32. Volume was more than 6 times the previous open interest in each strike, which indicates that new positions were established.

The trade is known as a ratio spread because twice as many contracts were sold as the number bought. That leaves the investor on the hook to deliver 1 million shares if BBY is at $35 or higher on expiration in mid-September, so he or she likely came into the session already long the name. The trader may have entered when it was closer to $40, well above current levels.

Yesterday's ratio spread cost just $0.35 and has the potential to return as much as 750 percent. The additional profit would offset losses in the stock price and lower the break-even point. (See our Education section more on managing positions with options.)

BBY fell 3.82 percent to $29.73 yesterday. It dropped sharply in January after a weak holiday season hurt sales, but then followed up with better-than-expected profit in February and May. Shares came into the session up 31 percent in the preceding six months, and the next quarterly report is scheduled for Aug. 26.

The stock also bounced around $35.60 shortly before the big January selloff. That could make some technicians expect it to stall if it reaches that level, which would help explain why the September 35s were sold.

Overall option volume in Best Buy was 7 times greater than average in yesterday's session, with calls accounting for a bullish 85 percent of the total.

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