The share price of Best Buy Co., Inc. (BBY) has remained in a downward trend since the company fell 12% the day after its latest earnings report was released in late November. Despite beating analyst expectations, investors bid down the share prices of Best Buy as analysts expressed fear toward consumer demand and high supply chain costs. Recent market volatility has not provided a foundation on which Best Buy stock can pivot to the upside.
At first glance, it appears thatr option traders are positioned for the Best Buy share price to reverse its recent downward trend. However, a deeper dive into the finer aspects of the Best Buy open interest paints a clearer picture. In addition, aspects of the Best Buy implied volatility suggest that the market is predicting further downside in the near term for Best Buy.
Whereas recent trading volumes for Best Buy appear bullish at first glance, a more in-depth analysis of recent open interest changes and the impact of implied volatility suggests that option traders are buying put options and selling calls.
- Best Buy stock remains in a sharp downward trend.
- Recent trading volumes appear bullish at first glance, but finer aspects of recent changes to the open interest appear bearish.
- The share price for Best Buy remains well below its 20-day moving average.
- Volatility-based support and resistance levels allow for a larger move to the upside.
Chart watchers can gain valuable insight into the overall sentiment toward Best Buy stock by combining an assessment of recent option activity with technical analysis of share price activity. The chart below depicts the recent price action for the Best Buy share price as of Tuesday, Dec 21.
The chart illustrates the share price action of Best Buy over the course of the past three months. Each candle represents one trading day. The blue lines are a historical volatility range formed by 20-day Keltner Channel indicators, which depict price levels that represent a multiple of the average true fange (ATR) for Best Buy stock. ATR is a standard tool for illustrating historical volatility over time. The outer bands of the historical volatility range widened after the earnings-based share price drop and appear to be further pushing outwards to the downside as the share price continues to decline.
From the left-hand side of the chart, Best Buy stock was in a mild downward trend, trading below its 20-day moving average. This is highlighted by the red arrow. This trend reversed at the beginning of October. This upward trend is highlighted by the green arrow. This helps to highlight the way that Best Buy stock rose to the extreme highs of the volatility range, topping out with its 52-week high the day before releasing earnings in late November.
After dropping 12% the day after reporting earnings, Best Buy stock has remained in a strong downward trend at the extreme low of the volatility range. This trend is highlighted in blue. It's interesting to note that, at this time, Best Buy stock has failed to trade above its 20-day moving average, even on an intraday basis.
In the past month, the highest Best Buy share price was $141.97, a 52-week high, in late November. This price is highlighted by the green balloon. Conversely, the lower share price during this time was $94.54 in mid-December, highlighted by the red balloon.
The Keltner Channel indicator displays a set of semi-parallel lines based on a 20-day simple moving average and an upper and lower line. Because the upper lines are drawn 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, this channel indicator makes for an excellent visualization tool when charting historical volatility.
Recent trading volumes of Best Buy options greatly favor calls over puts. On Tuesday, Dec. 21, over 8,000 calls were traded compared to 4,100 puts. This is nearly double the number of calls than puts, which, at first glance, appears bullish. However, trading volumes alone only tell one part of the story.
An analysis of a stock's open interest can provide greater context into the sentiment of option traders. The current open interest for Best Buy features 75,000 calls against 82,000 puts. While recent trading volumes are incredibly bullish, these open interest figures illustrate a more moderate view of Best Buy's share price from option traders. However, much like trading volumes, open interest figures require further analysis to provide deeper insights into option trader sentiment.
For Jan. 21, the next monthly option expiration date, there are a greater number of put options in the open interest than calls. The single option with the highest open interest is the $90 put with 4,400. This represents 7% downside to the current share price of Best Buy.
Considering at-the-money options and one strike in either direction up or down the option chain, there are more than 2.5-to-1 puts than calls in the open interest for Jan. 21. This is important to consider, as these strikes perhaps reflect more realistic price action based on current share prices rather than far out-of-the-money options, which may have numbers skewed by speculators and option sellers collecting premium. The current number, with far more puts than calls, expresses a bearish sentiment.
While the open interest is slightly bearish in total, option open interest as a whole is noticeably down. Over the past five days, total open interest has decreased 34%. While the open interest of puts has decreased by 22%, the call open interest has declined by 43% over this time period. This means that, while fewer option traders are willing to hold Best Buy options, more traders are taking positions with put options than calls. This is reflected in the put/call ratio, which has risen 36% in the past five days.
A key measure for option trader sentiment in open interest is implied volatility. For options expiring Jan. 21, implied volatility suggests that traders are selling calls and buying puts. That's because for call options, the open interest is rising while implied volatility is falling, suggesting that traders are selling more contracts on short positions in the option. Conversely, for put options, open interest is rising while implied volatility is also rising, indicating that traders are adding to long positions in the option.
While considering implied volatility, it is helpful to understand a concept known as volatility skew. Volatility skew is a measure of market implied volatility to both the upside and the downside, and the comparison of how they relate to each other. Current implied volatility skew is very bearish toward Best Buy. That's because the implied volatility for downside puts is greatly increasing relative to upside calls, which suggests that the market is pricing in a larger fear of a downside move for Best Buy. This skew can also be seen visually by the expanding volatility bands on the chart.
The chart below illustrates at-the-money options expiring Jan. 21. The green box represents the pricing that call option sellers are offering and it implies a 38% probability that Best Buy shares will close inside this range or higher by expiration. The red box illustrates the pricing for puts, with a 37% chance if prices go lower by expiration.
The Bottom Line
Over the past month, Best Buy shares have fallen 29.6%. The share price decrease and current downward trend was kick started by a 12% single day earnings-based share decline. Option traders appear to be positioned for the Best Buy share price to continue to fall in the near term. That's because the Best Buy put option open interest percentage is declining less rapidly than the call option open interest percentage, and the put call ratio has recently risen an alarming amount.