A Bearish Bet on Best Buy (BBY)

Utilizing the Zacks Most Active Options filter for today's column, consumer electronics guru Best Buy Co., Inc. (BBY - Analyst Report) caught my eye, which was bombarded by put speculators on Thursday.

Climbing the long put ladder

On Thursday, BBY saw roughly 20,700 puts change hands – almost quintupling its average single-session volume of about 4,300 puts, and nearly three times the number of BBY calls traded. Most of the volume transpired along three strikes in the December series of options, as the 38-, 40-, and 42-strike puts each saw more than 5,000 contracts cross the tape.

Digging deeper into the data reveals that the majority of the aforementioned put activity was related. In fact, it seems one gutsy investor may have initiated a three-tiered put spread on BBY, which makes money if the stock finishes in a narrow window before options expiration.

More specifically, around noon on Thursday, BBY saw several blocks totaling 5,000 Dec 38 puts change hands for the bid price of $0.48, suggesting they were sold. At the same time, an equal amount of Dec 40 puts crossed the tape for the bid price of $0.88, indicating they were also sold. Meanwhile, a block of 5,000 Dec 42 puts traded for $1.58; assuming these higher-strike puts were purchased, we may have uncovered a long put ladder on BBY.

Since the premium paid for the in-the-money Dec 42 put exceeds the combined premium received for the two short puts, the play was established for a net debit of $0.22 ($1.58 – [$0.48 + $0.88]).

The objective of the long put ladder is for the shares of BBY to finish between the sold 38 and 40 strikes by the time December-dated options expire. While both the trader's bought 42-strike put and sold 40-strike put would finish in the money, the intrinsic value of the long put would outweigh the cost of buying back the short put, resulting in a profit.

However, the long put ladder isn't for the weak-stomached investor, as the maximum profit on the play is limited, while potential losses can get ugly in the wake of a significant downside move. In this instance, the spread strategist's maximum gain is capped at $1.78 (bought put strike – higher-strike sold put – net debit), while the maximum loss stands at $36.22 ([sold put strikes – bought put strike] + net debit), assuming the shares tumble to zero.

On the charts

Technically speaking, the shares of BBY have advanced nearly 53% since the start of the year, and have outperformed the broader S&P 500 Index (SPX) by 10% during the past 40 sessions. Supporting the stock has been its ascending 10-month trendline, which has contained the equity's pullbacks since March. What's more, this moving average recently made a bullish cross with its 20-month cohort, which often signals additional strength on the charts.

However, it's not difficult to see why the aforementioned ladder strategist is anticipating a rejection in the short-to-intermediate term. Shares of BBY touched a new 52-week high of $43.50 recently, but are now facing a possible speed bump in the overhead $44-$45 neighborhood. This region played the part of support from mid-2005 to early 2008, and could now switch roles and act as a technical ceiling for the shares.

Word on the Street

On the flip side, shares of BBY could get a boost from an unwinding of skepticism on the Street. Despite the stock's quest for new highs, 11 out of 20 ranking analysts still issue lukewarm "hold" or worse ratings, according to Zacks.

Near-term option traders are skeptical of BBY, too. The stock's Schaeffer's put/call open interest ratio (SOIR) has been creeping higher during the past couple of months, and currently rests at 1.30, in the 60th annual percentile. In other words, short-term option speculators are more bearishly biased than usual toward BBY.

Furthermore, short sellers continue to swarm the stock, regardless of its journey into the black. Short interest on the equity advanced 18% during just the past month, and now represents 21.6 million BBY shares, or 6.3% of the stock's total available float. At the security's average daily trading volume, it would take nearly a week for all of these pessimistic positions to unwind.

In conclusion...

BBY's steady trek higher on the charts, juxtaposed with the wide-spread skepticism on the Street, makes for a potential contrarian bullish play. Should the stock perforate potential resistance in the $45 neighborhood, the lingering bears could abandon ship. A wave of upgrades and/or price-target boosts, a reversal in sentiment in the options pits, or a short-squeeze situation, could all act as potential catalysts to the upside for BBY.