Stock Option Trading News

Best Buy (BBY) Looking at Capital Allocation and China Expansion

Best Buy (BBY) Chief Financial Officer Darren Jackson publicly speculated yesterday about how the company allocates capital. The discussion has increasing relevance in light of this week’s announcement of Home Depot (HD) share-repurchase program.

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Jackson said in an investor’s Internet broadcast, “Home Depot set the high bar in terms of what type of financial engineering one wants to do in driving shareholder value. What we’re working through is, we want to strike the right balance between growth and return on invested capital.”

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Jackson feels Best Buy’s business strategy and operational policies are sound, but the company falls short in its financial planning and policies.

To back Jackson’s inference, many analysts and shareholders are agreeing Best Buy’s best use of cash at this time might be to buy back shares. Jackson, with the tone of a cheerleader, said, “We plan to be more aggressive on multiple fronts in returning cash to shareholders this year. What we haven’t done at this point is definitively define the level of aggressiveness where we’re willing to go.”

Best Buy is already on an aggressive buy back schedule. The company has repurchased nearly 400 million shares in the first quarter, compared with about 600 million in all of last year.

In other news yesterday, Best Buy announced it would be speeding up its expansion in China. The company is hoping the fast-growing Asian market will bring higher profits and growth.

Originally, the company planned to add three outlets in 12 to 18 months. The new plan is to open eight to 10 new stores in the Shanghai area over the next 18 months. Robert Willett, chief executive of Best Buy International, made this news public in a Shanghai press conference yesterday.

Looking at this News from an Options Trading Perspective:
Will Best Buy’s buy back mean profits for shareholders? Maybe, but this question gives us an opportunity to show off the nimble capabilities of the PowerOptions search platform. And because option data is often cumbersome and difficult to find, an investor really requires the aid of a solid tool to help them sort through the noise.

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Potential Trades:
The August Best Buy option trades have 58 days until expiration, and the September trade has 92 days until expiration. These trades were discovered using the powerful suite of option search tools found at PowerOptions.

PowerOptions covered call search Best Buy (58 and 92 days)
BBY $44.43 BBYHI 07 AUG $45.00 $1.40 3.20% 3.30% 4.60%
BBY $44.43 BBYHV 07 AUG $42.50 $2.85 6.40% 2.20% 2.20%
BBY $44.43 BBYII 07 SEP $45.00 $2.15 4.80% 5.10% 6.40%
(For more details click the ticker symbol above)

These trades offer 3.2% to 6.4% downside protection and 2.2% to 6.4% potential profit. For the full profit to be realized, the stock must be at or above the option’s strike price at the end of the option period. In this case, the strike price of the options are either $42.50 or $45.00 with a expiration date of either the third Friday in August or the third Friday in September (see chart for details on specific trade). The stock is currently trading at $44.43.

Competitors for BBY include: Circuit City Stores Inc. (CC), Dell Inc. (DELL), Wal-Mart Stores Inc. (WMT), Conns Inc. (CONN), Gamestop Corp. (GME), PC Mall Inc. (MALL), Renters Choice Inc. (RCII), RadioShack Corp. (RSH), and Tweeter Home Entert. (TWTR).
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[tags] Darren Jackson, China, Shanghai, Robert Willett, BBY, Best Buy Co. Inc., CC, Circuit City Stores Inc., CONN, Conns Inc., DELL, Dell Computer Corp., GME, Gamestop Corp., HD, Home Depot Inc., MALL, PC Mall Inc., RCII, Renters Choice Inc., RSH, RadioShack Corp., WMT, Wal-Mart Stores Inc., covered call investment strategy, help with options, how to write covered calls, investing in options, investment strategy, iron condor, option investing, options trading, poweroptions, stock option trading, stock options [/tags]

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