A Trade on Bed Bath & Beyond Inc (BBBY)

Dear fellow options traders :

First of all, I want to wish everyone a Prosperous 2008 with your options trading!!

Checked that Bed Bath & Beyond Inc (ticker : BBBY) would be reporting earnings on 3 Jan 2008, after-market-close.

Bed Bath & Beyond Inc operates a retailer chain selling a range of domestic merchandise and home furnishings products. My first thought was naturally geared towards whether the company's business would be affected by the current housing market slump. As we know, the housing market have been hit quite badly for the past 2 years. Investors by now should be fully aware of the fallout of the sub-prime mortgage sector and the alarming rate of mortgage defaults & foreclosure. On 28 Dec 2007, the housing market plunged deeper into despair as it was reported that in Nov 2007, sales of new homes plummeting to their lowest level in more than 12 years, heightening fears that the US might be thrust into a recession. New-home sales tumbled 9% in November 2007 from October 2007 to a seasonally adjusted annual sales pace of 647,000, the worst sales pace since April 1995.

At the same time, I read from a Fool.com report that BBBY's operating margin has been slumping for the past few quarters. It was also reported that in first six months of Bed Bath's fiscal year 2007, the chain generated just less than $125 million in free cash flow and yet the company went ahead with the share repurchase program.

I've studied that BBBY's past gapping range after earnings was around $2.00. Thus, on 3 Jan 2008, I paper-traded 2 lots of near-the-money Feb '08 27.50 put at $140.00 per contract when BBBY was trading around $27.50.

On 3 Jan 2008 after-market-close, Bed Bath & Beyond Inc (BBBY) reported Q3 earnings of $0.52 per share, which included $8 million tax gain and might not be comparable to the consensus of $0.52; revenues rose 10.9% year/year to $1.8 bln vs the $1.77 bln consensus. But the company issued downside guidance for Q4, expecting EPS to be $0.64-0.67 vs. $0.78 consensus; and would be expecting flat comps for Q4.

On 4 Jan 2008 before market opened trading, the Dow future was already down more than 100 points when disappointing employment data were reported. The December non-farm payrolls came in at only 18K. The economists were expecting payrolls to increase by 70K. The unemployment rate was also at an alarming rate of 5.0%, giving further hint of a possible economy slump. The market didn't react well to BBBY's earnings too, as the stock price gapped down -$2.30 to $25.12 when market opened trading.




I watched the Level 2 code, candle stick chart movement and trading volume and sold the 2 lots of puts for $300.00 a contract when I noticed that the selling pressure (circled in red in the chart) has precipitated. The paper profit was $290.00 after deducting commission.

Yours Truly,

Tony Chai
Options Trading Resources

P.S. BTW, I've just completed an e-book entitled "How To Avoid The 5 Silly Options Trading Mistakes I've Made",which is rather self explanatory on how you could save your hard-earned capital by learning from the money-losing experieces that I have encountered during my options trading journey. You can claim this e-book for FREE by sending an email to chchai.options4u@info.trafficwave.net. Once you're in the mailing list, I would also be sending you emails at time where I would highlight potential stocks for earnings gapping analysis trade for your consideration. So do look out for them :)