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Bearish pre-earnings Bed Bath bets deliver payoffs
* Bed Bath & Beyond put activity picked up before earnings
* Large block of July $67.50 puts traded before close-trader
* Bed Bath shares lose more than 17 pct
* Some option traders on Thursday look for rebound in shares
By Doris Frankel
June 21 (Reuters) - Some investors reaped a tidy windfall with well-timed bets in Bed Bath & Beyond bearish options placed before the retailer reported a weaker-than-expected profit outlook on Wednesday.
Bed Bath & Beyond shares sank more than 17 percent to $61.10 on Thursday afternoon, the day after the company issued its outlook. The stock had hit its highest level ever on Tuesday, closing at $75.84.
Bed Bath & Beyond put options, which rise in value if the stock price falls, had shown an increase in activity on Wednesday before the earnings announcement.
Traders exchanged 17,000 puts and 12,000 calls on Wednesday, 6.4 times the average daily turnover, according to options analytics firm Trade Alert. The stock closed at $73.67.
The most popular option was the weekly June $75 strike calls followed by the June weekly $72.50 strike puts, both expiring on Friday after the close.
"It appears that option traders were betting on a large move in the stock in either direction by buying both front-month puts and calls heading into the earnings," said Stefen Choy, a co-founder of options analytics firm Livevol in San Francisco.
The sharp decline in the stock price resulted in big profits on paper for some investors who had picked up puts, contracts that grant the right to sell the company's shares at a fixed price by a certain date. Investors often turn to puts hoping to profit from a decline in the share price.
Anyone who bought these short-term June $72.50 strike puts on Wednesday, when they closed at around $1.60 per contract, made roughly 500 percent in profit if they were to close their position on Thursday, Choy said.
The weekly June $72.50 strike puts traded at $9.80 per contract during Thursday's session.
Buyers of these slightly out-of-the-money puts need the stock to move below $70.90 by Friday to make a profit. These puts had volume of 2,314 contracts on Wednesday, exceeding the open interest of 1,200 contracts at the time, Choy said.
In the July $67.50 strike put, volume was active as 2,000 contracts traded on Wednesday against 1,500 in open positions. The biggest block was 1,500 contracts traded for $1.08 each just 19 minutes before trading closed, said Jon Najarian, a co-founder of online brokerage TradeMonster in Chicago.
The trade would require the stock to move below $66.50 by July expiration in order to be in-the-money, he said. These options were worth $5.80 per contract on Thursday, roughly a 470 percent increase from Wednesday's price, Najarian said.
"Given that this trade came just before the close and was in the right direction, it could bear some scrutiny from U.S. security regulators," Najarian said.
But according to Livevol data, it was not clear if the customer bought or sold these puts.
The circumstances surrounding the put activity may also reflect speculative bets or plain luck.
"It's normal to see a lot of speculative trading ahead of a scheduled earnings release," said Steve Nosnick, equity risk manager at Timber Bill, a division of Interactive Brokers Group.
The U.S. Securities and Exchange Commission, which looks into unusual stock and option trading, declined to comment.
Meanwhile, some option traders on Thursday appeared to be taking bullish positions in Bed Bath & Beyond on the view that Thursday's sharp stock decline was an overreaction.
The upside weekly June $65 calls expiring on Friday and the July $65 strike calls were among the most active on Thursday, "suggesting that some investors believe today's 17 percent drop in the shares is overdone," said WhatsTrading.com options strategist Frederic Ruffy.
Option volume on the stock was 11.4 times the norm on Thursday, with 36,000 puts and 28,000 calls traded near the close, data from Trade Alert showed.
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