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Best Buy Co Inc (BBY) Stock and Retail Got Whacked. Here’s How to Trade.

Tyler Craig

InvestorPlace - Stock Market News, Stock Advice & Trading Tips

Retail stocks were monkey-hammered Monday, big league. And that’s creating an opportunity for traders willing to play despite the devastation. The two areas that look the most interesting are the SPDR S&P Retail ETF (NYSEARCA:XRT) and Best Buy Co (NYSE:BBY). While XRT enables us to play the entire space, BBY stock boasts one of the better-looking charts in what has become a terrible group.

Best Buy BBY Stock

Source: Austin Kirk via Flickr

More on both in a moment, but first let’s take a brief survey of Monday’s wreckage.

Abercrombie & Fitch Co. (NYSE:ANF) led the descent with a harrowing 21% haircut after announcing it was officially ending its search for a buyer. Its chart looks like garbage, so if you care at all about technicals, you’ll steer clear until more definitive signs of a bottom appear. Other notables among Monday’s biggest losers include Bed Bath & Beyond Inc. (NASDAQ:BBBY), Wal-Mart Stores Inc (NYSE:WMT) and the aforementioned BBY.

Of the bunch, Best Buy has the most impressive looking setup for those looking to go shopping. But if you’d prefer to play the entire industry, I’ll include an XRT trade idea.

Best Buy Stock Charts

While BBY stock’s tumble is being blamed on newfound competition from Amazon.com, Inc. (NASDAQ:AMZN), it’s not the news that interests me as much as the reaction to the news. Before Monday, BBY was behaving quite well which made the unexpected gap quite the sucker punch.

Let’s take a quick look at the weekly chart to survey the level of damage.

For starters, the uptrend is still well-intact. Yesterday’s down-gap did take out a short-term support pivot at $54.65, but we still have four trading sessions remaining before the weekly candlestick fully forms. So we could see the stock rally back and close above support, which would make this entire episode a failed breakdown.

BBY stock chart weekly view

Click to Enlarge Source: OptionsAnalytix

Unlike the bulk of its peers, Best Buy’s weekly trend still looks solid. Provided we remain above $50 (which is the next support pivot), buyers continue to deserve the benefit of the doubt.

The damage is easier seen on Best Buy’s daily chart.

BBY stock chart daily view

Click to Enlarge Source: OptionsAnalytix

On the bearish side of the ledger, we have the potential support break of $54.65, the breach of the 50-day moving average, and high volume. What should provide some optimism, however, is the unfilled gap which is likely to turn into support near $52. This level loosely corresponds to the weekly pivot near $50 mentioned earlier.

Long story short, if you’re a buyer of this dip and are willing to bet BBY remains above $50 for the next month then consider selling a naked put option.

Make Best Buy’s Pain Your Gain

Monday’s swoon led to a mad dash for option protection. The demand surge lifted Best Buy’s implied volatility rank to a six-week high. And that means option sellers can now sell their wares for a pretty penny.

Sell the Aug $50, put for 65 cents. If the stock can remain above $50, you will capture the 65 cents expiration. The initial margin requirement for the trade should be around $650, so your potential return on investment is close to 10%.

Not a fan of BBY Stock? Trade XRT Instead!

For those wishing to sidestep stock picking altogether, you can always trade the entire retail industry with XRT. The fund is down 6% over the past four trading sessions and getting a touch oversold. Its implied volatility rank is even juicier than Best Buy at 58%.

If you want to be a contrarian bull in retail, then sell the Aug $37 naked put if it rises in value to 50 cents over the next few days.

As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities. Want to learn how to master the art of option selling for high-probability cash flow? Check out the replay of Tyler’s recent webinar on how to systematically sell Iron Condors for monthly income.

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