It’s Time to Take the Unusual Options Activity for Bed Bath & Beyond (BBBY) Seriously

In some cases, going the opposite direction of prevailing market sentiment may yield incredible profitability. However, for beleaguered retailer Bed Bath & Beyond (BBBY), it’s time for anyone not a hellbent gambler to recognize clear fundamental warnings. Recently, bearish transactions in the options market provided a wake-up call for BBBY stock, one that most investors should heed.

As a guttural, reactionary mechanism, the upside narrative for Bed Bath & Beyond understandably draws attention. In the middle of the post-pandemic new normal, the concept of meme stocks gripped Wall Street. Essentially, people coordinated their trading activity via social media platforms, usually targeting distressed enterprises to spark a short squeeze. While the concept sprouted like wildfire, throughout 2022, these meme trades – which include BBBY stock – suffered steep losses.

On a year-to-date basis, BBBY stock hemorrhaged nearly 70% of equity value. At this point, hardened contrarians might view this setup as an opportunity to scare bearish traders off their “negative” positions. Unfortunately, this time around, circumstances might favor the pessimists.

If you consider the financials, BBBY stock enjoys alarmingly few points of justification to rise above the muck. According to data from Gurufocus.com, Bed Bath & Beyond features a three-year revenue growth rate that’s 4% below parity. Its book growth rate during the same period fell over 52% below breakeven. On the bottom line, the company’s operating and net margins both dipped into negative territory.

If that wasn’t enough of a concern, the retailer’s return on equity ranks as one of the very worst in the retail (cyclical) industry. At some point, the fundamentals have to justify any bullish trades on an embattled organization. It’s difficult to see where Bed Bath & Beyond will gain this critical lifeline.

Bears Smell Blood From BBBY Stock

Following the ringing of the closing bell of the Oct. 28 session, BBBY stock became one of the highlights (or rather lowlights) of unusual options activity. Specifically, the bears targeted the $2 puts with an expiration date of Jan. 17, 2025. That gives traders 811 days since the time the order was placed before the options expire worthless.

Volume for the aforementioned puts hit 16,590 contracts against an open interest reading of 322. Further, the bid-ask spread as represented by the midpoint price ($1.21) came out to 4.96%. That’s fairly narrow, which generally reflects greater liquidity (i.e. demand) for the trade.

For the record, BBBY stock closed at $4.59 on the Friday session. Therefore, shares must decline by 56.43% for the puts to be at the money. Given the timeline to achieve this pricing level and the poor fundamentals undergirding the retailer, it seems like a reasonable bearish bet.

To be fair, though, the recent pessimism toward BBBY stock runs counter to the prevailing sentiment in the options market. According to data from Barchart.com, BBBY’s put/call open interest ratio stood at 0.56. Usually, the delineation between bullish and bearish sentiment stands at 0.70, with figures below this level indicating that more people are buying calls than puts.

That said, Wall Street’s top experts remain unconvinced with the retailer’s comeback potential. Three months ago, analysts gave a consensus rating of “moderate sell” for BBBY stock. In the current month, the consensus did not change. What did shift, however, was that more experts pegged BBBY as a “strong sell” (nine analysts in the current month versus six analysts three months ago).

Outside Factors Don’t Help

Statistically speaking, BBBY stock will likely still attract bullish speculators. As of Oct. 14, 2022, shares featured a short percentage of float of 105.06%. Typically, anything above 10% represents a high magnitude of short interest. Therefore, traders do need to be cautious about the bearish position.

However, while the above dynamic may be responsible for the occasional pop higher, it appears doubtful that BBBY stock can sustain a market rally. For one thing, the short ratio or days to cover is only 3.06 based on average trading volumes. Therefore, under a full panic, it won’t take that long for bears to cover their positions.

Still, it might not come to that point. Based on macroeconomic data, it’s hard to see where Bed Bath & Beyond will capture demand relative to its competitors. Primarily, the Federal Reserve will have a lot to say about the fate of BBBY stock.

Under an inflationary cycle, discretionary retailers face pressure from rising prices. Of course, the Fed is committed to attacking the inflation problem, which should reduce pricing pressures. However, this hawkish monetary policy may end up slowing the economy into a recession, which would cause many people to lose their jobs.

Put another way, whether we incur inflation or deflation, the net impact to the consumer is the same: fewer dollars for discretionary purchases. Thus, unless something were to change this framework, BBBY stock objectively remains suspect.

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