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BBY and the Efficient Options Market by Russell Rhoads, CFA

by rrhoads on 12-13-2011 09:34 AM

Any casual market observer has probably been made aware that Best Buy (BBY) reported their earnings and the stock is reacting negatively this morning.  As I type this at my breakfast table in suburban Chicago the stock is down 2.37 to 25.70 in pre-market trading.  When I see this sort of price change off an earnings report I immediately do one thing - check the next expiring option pricing from the night before.   I like to see if the market got the price change right and it this case (at least as far as the magnitude of the price change goes).  The way to go about this is to check the prices for the next expiring straddle.   For BBY this would have been the Dec 28 Straddle that expires this Friday as the stock closed at 28.07 last night.  The BBY Dec 28 Call was priced at 1.18 and the BBY Dec 28 Put closed at 1.11 for a straddle cost of 2.29 – pretty darn close to how much BBY is down on the day at this moment.  Of course prices change so we’ll see how well the price move in BBY was estimated by the end of the day.

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Comments
by kevin7806@yahoo.com on 12-13-2011 08:19 PM
Options

If I remember correct, you made recommendation for bullish call spread against earning call this Sunday. This is prefect to setup a straddle on DEC 11 28 Call / Put. Both call/put IV over 70% and Gamma over 14 on Tuesday! As you have pointed out with cost of 2.29 and close at 4.25 (DEC 11 28 put today) this is good for over night trade.

 

http://communities.cboe.com/t5/What-s-On-Our-Minds/Russell-s-Round-Up-Weekend-Review-by-Russell-Rhoa...

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by rrhoads on 12-18-2011 09:44 PM
Options

Kevin - thanks for the comment (and sorry for the late response - I was out most of last week and just saw your comment) - the recommendation was from Options Action and was a bullish one!  I just thought it was a great depiction of how well the options price in the overnight moves.  I've always had an interest in reactions to earnings reports.

 

 

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About the Author
  • Mr. Bittman is the author of two books, Options for the Stock Investor, (McGraw-Hill, 1996), and Trading Index Options (McGraw-Hill, 1998). He teaches courses for public and institutional investors, and he has presented several custom courses throughout the U.S., Europe, South America and Southeast Asia. In 1980 Mr. Bittman began his trading career as an equity options market maker at the Chicago Board Options Exchange. From 1983 to 1993, he was a Commodity Options Member of the Chicago Board of Trade where he traded options on financial futures and agricultural futures. Mr. Bittman received a BA, magna cum laude, from Amherst College in 1972 and an MBA from Harvard University in 1974. In addition to his responsibilities at The Options Institute, Mr. Bittman is also a member of the faculty of The Illinois Institute of Technology, where he teaches in the masters level Financial Markets and Trading Program.
  • Mr. Kearney began his long association with the CBOE when he became an independent Market Maker in early 1981. Mr. Kearney traded options full time on the trading floor until 1992 and periodically thereafter until 1996. In early 1992 he became a founding partner and Registered Options Principal of a brokerage firm based in Chicago, a member firm of the CBOE. Mr. Kearney’s responsibilities included development and implementation of hedging and trading strategies using listed options for their institutional clients as well as their retail investors. Mr. Kearney is the co-author of Understanding LEAPS®, published by McGraw-Hill, September 2002. He has been a regular contributor to many news services including Reuters, Derivatives Week, BARRON’S, CNBC, Bloomberg, Group W, The CBS Radio Network, FORTUNE, Ticker Magazine, Stock Futures and Options, BBC TV and Radio, NPR, and others. Mr. Kearney served on various committees at the CBOE, including the Arbitration Committee from 1984 to 1996. Prior to joining the CBOE Mr. Kearney was a marketing director for NCR Corporation. Mr. Kearney is a graduate of St. Mary’s University (MN), BS, 1971, and pursued his MBA at Lake Forest Graduate School of Management. In 2006 he completed a 3-year SII/SIA program at the Wharton School of the University of Pennsylvania.
  • Peter B. Lusk is an instructor at the Options Institute, the educational arm of the Chicago Board Options Exchange. He teaches option courses for public and institutional traders and has contributed educational type articles to various financial publications. Peter has spoken to thousands of investors across North America the past few years including over 200 webinars for the CBOE and member firms on trading options. He can also be seen each week on CBOE-TV with his show, Strategy of the Week. In addition to his responsibilities at the Options Institute, Peter serves as an Instructor for the Options Industry Council – an organization representing the options industry in the U.S. Prior to working at the Options Institute, Peter was a highly successful market maker for many years on the floor of the CBOE trading equity options. He was also involved in options training for new market makers at Lakota Trading in Chicago. As a professional trader, Peter enjoys sharing his knowledge of proven option strategies and risk management at the Options Institute.
  • Russell Rhoads, CFA, is an instructor with the Options Institute at the Chicago Board Options Exchange. He joined the Institute in 2008 after a career as an investment analyst and trader with a variety of firms including Highland Capital Management, Caldwell & Orkin Investment Counsel, TradeLink Securities and Millenium Management. He is a financial author and editor having contributed to multiple magazines and edited several books for Wiley publishing. In 2008 he wrote Candlestick Charting For Dummies. Since joining the Options Institute he authored Option Spread Trading: A Comprehensive Guide to Strategies and Tactics which was released in January 2011 and recently finished work on Trading VIX Derivatives: Trading and Hedging Strategies Using VIX Futures, Options, and Exchange Traded Notes which was published in August 2011. In addition to his duties for the CBOE, he instructs a graduate level options course at the University of Illinois – Chicago and acts as an instructor for the Options Industry Council. He is a double graduate of the University of Memphis with a BBA ('92) and an MS ('94) in Finance and also received a Master's Certificate in Financial Engineering from the Illinois Institute of Technology in 2003.
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