Bloomberg Radio presenters were falling over one another earlier Thursday morning to describe not the pre-market slide in shares of electronics retailer Best Buy (NYSE:BBY), but the “cratering” of its stock price. Host Tom Keane described the slide as an “eight-standard deviation move” (see chart 4 at the end of this piece). Comparable holiday store sales disappointed and the turnaround strategy of its CEO Hubert Joly of creating in-store pods from key brand names failed to lure customers even as Best Buy kept on discounting prices. Its shares fell by around $11.00 or nearly 30% premarket in response to the communication from the company. So this situation falls perfectly into the “what are the chances of that happening?” category. For options traders that is a clinical question and one where we think we can shed some light. We took some screen shots to show the Probability Distribution based upon prevailing options prices as of Wednesday’s close to show the predicted likelihood of a fall of such magnitude.
The first chart uses Friday’s options (two days) expiration to show that options traders assigned ZERO chance of a plunge of such magnitude. Best they could do was to assign a 1.94% chance that shares would close on Friday in the range of $30-31.00. Chart 2 shows the next expiration date of Friday, Jan. 24. At least this time options assigned some likelihood of the price closing between $27.50-30.00. In this case the chances were a mere 2.61%. Yet that price is still in excess of the current trading price.
Chart 3 displays the Feb. 21 expiration – five weeks away. In this case the market assigned a 1.2% likelihood that shares will close at that time in the $26.00-27.00 range. Such powerful trading technology tools allow investors to imagine the possibilities and weigh them by the probabilities, as we like to say around here. If your trading view differs with that of the market, you might care to look at what option markets are implying.
Chart 1 – January 17 2014 Expiration
Chart 2 – January 24 2014 Expiration
Chart 3 – February 21 2014 Expiration
Chart 4 – Best Buy shares slide