BBBY Analysis

Bed Bath & Beyond Inc. (BBBY)

Update 12/21/2017: BBBY announced earnings of  $0.44 per hare, 13.6% higher than the analyst consensus forecast of $0.3874. The price spiked about $2.50 in overnight trading, quickly falling back by $2.50 and then after the opening bell, declined further, tracing a sideways pattern about $3 below the prior day’s close. I would have had a better result had I exited earlier at less than my goal of 25% of maximum potential profit.

Shares declined by 10.0% over my holding period of less than a day, or a -3,641% annual rate.The options position produced a -10.9% loss for a -3,977% annual rate.

BBBY had contradictions going into the trade, with a bearish Zacks rank of 4 but a 2.00 expectation of a positive earnings surprise. And both metrics performed as one would expect: There was a positive earnings surprise, and the price thereafter did fall.

The actual price move form the pre-earns close to the post-earns extreme was -3.44, or $1.21 beyond the expected price move. The best profit zone I could establish, $2.71, covered the expected move, but the hive mind of the market did the unexpected.

The post-earns moves metrics of the last four earnings announcements came closer to forecasting what actually happened. The average of the four events was a $3.50 movement, pre-earns close to post-earns close. The actual movement was  a decline of $3.06.

My takeaways are these:

  • Don’t accept inconsistencies. If the earnings surprise predictor and the rank don’t match, pass on the the trade.
  • If the historical post-earns moves differ sharply from the expected move based on options pricing, then require that the profit zone cover a certain percentage of the larger of the two spans, in both directions. What percentage? I don’t know yet, but I shall think on it between now and the advent of the post-holiday rush.

BBBY publishes earnings on Wednesday after the closing bell.

I shall use options that trade for the last time nine days hence, on Dec. 29.

Implied volatility stands at 56%, which is 5.8 times the VIX, a measure of the volatility of the S&P 500 index.

BBBY’s IV stands in the 75th percentile of its annual range and the 67th percentile of its most recent broad movement.

The price used for analysis was $24.14. BBBY has contradictory metrics; it is in an uptrend with a good chance of an earnings surprise, yet it is rated bearish for the longer term. That being the case, I shall essay a direction-neutral iron fly spread.

Premium: $2.29 Expire OTM
BBBY-iron fly Strike Odds Delta
Calls
Long 28.00 88.7% 14
Break-even 26.29 80.0% 26
Short 24.00 52.0% 54
Puts
Short 24.00 48.0% 46
Break-even 21.29 79.0% 17
Long 19.00 92.7% 5

The premium is 50.9% of the width of the position’s wings.

The risk/reward ratio is 1.2:1.

The zone of profit in the proposed trade covers a $2.29 move to the upside and a $2.71 move to the downside. The biggest immediate move after each of the past four earnings announcements was $4.29, and the average was $3.50. After eliminating the maximum and minimum post-earnings movements, the central tendency is $4.21.

The expected move covering 85% of occurrences is $2.23, within the profit zone in either direction.

The bid/ask spread is 10.0%.

Decision for My Account

I have entered a position on BBBY as described above. The stock at the time of entry was priced at $24.06. Post-earns moves over the past year were so much greater than the expected move or any profit-zone coverage possible on this options grid that I had to decide to trust one set of data or the other. I chose the forward looking expected move rather than the backward looking historical moves.

By Tim Bovee, Portland, Oregon, Dec. 20, 2017

Disclaimer

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.

No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decisions for his or her own account, and take responsibility for the consequences.

License
Creative Commons License

All content on Tim Bovee, Private Trader by Timothy K. Bovee is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.

Based on a work at www.timbovee.com.

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