Monday, July 2, 2012

Best Buy (BBY) - Stock and Vol Up on LBO "No" News

BBY is trading $21.92, up 4.6% with IV30™ up 6.4%. The LIVEVOL® Pro Summary is included below.


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Best Buy Co., Inc., incorporated in 1996, is a multinational retailer of consumer electronics, computing and mobile phone products, entertainment products, appliances and related services.

Before we get to the analysis, let's look to the news today that's driving the vol up:


(Reuters) - Best Buy Co Inc's (BBY.N) former Chairman Richard Schulze is not expected to present a buyout or other proposal to the company's board anytime soon, a person familiar with the situation said.

Media reports said Schulze was close to presenting an offer for the consumer electronics chain. Discussions around a leveraged buyout of the company are still in the early stages, the person said.

Source: Reuters via Yahoo! Finance; No bid by Best Buy ex-chairman to come soon: source, reporting By Nadia Damouni; editing by Gerald E. McCormick.


BBY showed up on the real-time custom scan that searches for high vols relative to the short-term and long-term historical realized vol.

Custom Scan Details
Stock Price GTE $7 and LTE $70
IV30™ - HV20™ LTE 10
HV180™ - IV30™ LTE -8
Average Option Volume GTE 1,200
Industry isNot Bio-tech
Days After Earnings GTE 10 and LTE 60

The goal with this scan is to identify short-term implied vol (IV30™) that is elevated both to the recent stock movement (HV20) and the long term trend in stock movement (HV180). I'm also looking for a reasonable amount of liquidity in the options (thus the minimum average option volume), want to avoid bio-techs (and their crazy vol) and make sure I'm not selling elevated IV30™ simply because earnings are approaching.

Let's start with the Charts Tab (six months), below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

On the stock side, I've highlighted the drop from earnings on 3-29-2012 as well as the recent run up. With the move today, the stock is up more than 18% since 6-25-2012. The 52 wk range in stock price for BBY is [$17.39, $31.71], with a 2-year high of $44.86.

On the vol side, I've highlighted the awesome vol rise into last earnings on 5-21-2012, when the stock moved just $0.29. But, most importantly, I've highlighted the recent vol rise. Since 6-25-2012, while the stock has been up 18%, the vol has risen 32%. In English, the risk reflected by the options has outpaced the move up in stock. And, although I mention this occasionally it's worth stating again, vol does not necessarily go down as a stock rises. With the move in the implied, the vol comps are now:

IV30™: 56.81%
HV20™: 45.67%
HV180™: 39.14%

It's those levels that triggered the custom scan. The 52 wk range in IV30™ for BBY is [25.58%, 70.98%], putting the current level in the 65th percentile.

Let's turn to the Skew Tab, below.

I've included just the font two months this time. Aug is elevated to Jul ATM due to an earnings announcement expected in the Aug expiry (but after Jul). I do note the OTM skew for both calls and puts in Jul is above that for Aug, though Aug has the earnings vol. This poses an interesting analysis surrounding a calendar spread of some sort.

Finally, let's look to the Options Tab* (below).

Across the top we can see that Jul vol is priced to 55.57% while Aug is priced to 58.47%. Looking at some random OTM options, we can see that Jul 19 puts are priced to ~65% vol vs 60% in Aug (with earnings), so a sort of backwards vol pricing.

*NB: The options tab snapshot was based on an underlying price of ~$22.28.

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