The Driver

House accessories retailing giant Bed Bath & Beyond (BBBY) reports after Wednesday’s closing bell. Analysts expect profits of $1.02 per share compared to the year ago period’s $0.93. Sales growth of 21.5% is forecasted on revenues of $2.59B compare to $2.13B in 2011.

Analyst View

Yesterday, research shop Argus noted a key factor of concern will be whether the company is able to maintain its status as a top-tier merchant or whether online (AMZN) and brick and mortar competitors (TGT, WSM, WMT, TJX) are further cutting in on its sales following its Q1 sales shortfall. Argus went on to say they believe its Cost Plus World Market acquisition will be a positive catalyst during the next year and raised its FY14 profit estimate by a nickel to $5.20 per share.

Separately, broker UBS raised its price target from $66 to $72.60, also on the belief the merger will be favorable, though a wildcard for tonight’s Q2 earnings announcement. Analysts there see their penny above views estimate of $1.03 EPS as ‘conservative’ but maintained their “Neutral” on shares despite the stock trading at a discount to its peers.

The Chart

Figure 1: Bed Bath & Beyond (BBBY) Daily Chart

For the bulls, shares of BBBY are up about 1.25% (not shown) in front of tonight’s report after narrowly establishing a slightly lower low. Wednesday’s hammer reversal candlestick is setting up an unconfirmed three-day pullback pattern just below its 10-SMA which supported shares during the past month as BBBY broke out above June 21, Q1 earnings fallout and began to fill its 17% bearish price gap. With the latest price action, BBBY is signaling a bullish 50/200SMA “Golden Cross” and maintaining proper moving average alignment with its 10, 30, 50 and 200 all stacked on top of one another.

For the bears, our technical pal PS Elliott sizes up BBBY’s situation as one which maintains an existing W5 completion on the daily. The topping could be further confirmed by Tuesday’s pressure which establishes a lower high pattern. At the same time, the weekly view is putting together a similar bearish formation as a lower weekly high and W5 top have signaled.

Option Activity

Immediately in front of tonight’s report, calls are favored over puts by about a 1.5-to-1.0 margin on BBBY’s heaviest volume of the year and totaling some 43,000 contracts. Most active on the session and a two way tie suggestive of a crowd “strangle by proxy”, roughly 6,500 September 75 calls and 65 puts have traded throughout the session in mostly smaller lots.

With shares near 69.25, the strangle is slightly tilted towards the put contract. Incidentally, implieds are also skewed with the puts trading in the low 120s versus about 103% for the call. As short interest is fairly low, the pricing looks to reflect a typical condition found in most equities wherein lower strike protective contracts are more dearly held by traders. Of course and not likely forgotten, that type pricing came in very handy during last quarter’s technical bloodbath.  

With two trading days remaining, opening buyers of the strangle are currently pricing the long curve/gamma and long vega strategy for $1.23 per spread. Thus, in order to breakeven this type of premium bull will need shares to be below 63.77 or above 76.23 at expiration in order to turn to begin turning a profit.

On the other hand, looking at the theoretical expected move being factored into BBBY’s earnings event, implieds of 112% for the ATM September 70 strike suggests ‘those’ traders are pricing in a 68% or 1SD chance BBBY will remain within 8.30% of its current share price through expiration. That amounts to an overall slightly tighter range of 63.50 to 75 a share.

With implieds essentially the same between the two strategies, the difference in break evens comes down to the fact a strangle always trades for less money than the straddle but requires larger movement from the underlying in order to realize profits. If that relationship was out of whack, traders would be less concerned about earnings and more focused on ‘ironing’ out some butterflies in Bed Bath & Beyond's call and put markets with a short straddle and long stangle.

Chris Tyler
Senior Options Writer, former Market Maker & fulltime Option Hedge Hog Advocate
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The information offered here is based upon Christopher Tyler’s observations and strictly intended for educational purposes only, the use of which is the responsibility of the individual.