Unusual Options Activity Clashes with the Bulls Over Bed Bath & Beyond (BBBY)

While memes dominated the retail investment landscape in 2021, this year, the skyrocketing inflation rate and geopolitics (via Russian President Vladimir Putin’s extracurricular activities) have soured sentiment for speculative market ventures. Nevertheless, the memes may be resurfacing, with Bed Bath & Beyond (BBBY) in particular surging 29% on Tuesday. However, not everyone is clamping at the bit for BBBY stock, presenting a tricky narrative.

First, short-squeeze sentiment has bubbled to the top, with BBBY stock attracting considerable attention on platforms like Reddit's WallStreetBets. Tracking data indicated that Tuesday represented the 14th gain out of the last 15 sessions for Bed Bath & Beyond shares. Further, momentum has been building. Over the trailing five days, BBBY has nearly doubled while in the trailing month, shares have boomed 316%.

As other analysts have pointed out, no fundamental catalyst was apparent for the enthusiasm toward BBBY stock. Instead, it appears retail traders are merely hoping to blow up the bears’ short positions, thus forcing a squeeze higher. According to analytics firm Ortex, 50.7% of Bed Bath & Beyond’s public free float is held short, meaning that pessimists will profit should BBBY decline in market value.

However, the big news for the embattled retailer was that activist investor Ryan Cohen, via his investment vehicle RC Ventures, acquired 1.67 million call options on BBBY stock. According to a Form 3 document which Cohen filed on Aug. 14 with the U.S. Securities and Exchange Commission, the calls – which range from strike prices of $60 to $80 – all feature an expiration date of Jan. 20, 2023.

Still, not everyone is convinced about Bed Bath & Beyond’s bullish implications.

Puts Light Up the Board for BBBY Stock

Following the ringing of the closing bell on Aug. 16, bearish transactions against BBBY stock represented some of the oddest trades regarding unusual options activity. Leading the way were $25 puts with an expiration date of Aug. 19, 2022. Volume reached 13,988 contracts against an open interest reading of 179.

Coming in right behind the aforementioned trade was bearish activity for the $18 puts, also with the same expiration date. Here, volume reached 25,204 contracts against open interest of 333. BBBY stock closed in the open market at $20.65.

For the first put, the bid-ask spread as represented by the midpoint price ($6.70) was 2.98%. For the second put, the spread was 1.09%. Both metrics are relatively low compared to many other fast-moving stocks, implying substantial liquidity for the trade. As well, underlying market makers have a high degree of confidence in properly placing these transactions.

With only three days (from the time of writing) till expiration, traders are likely betting that the “buy the rumor, sell the news” effect will quickly turn on BBBY stock. In other words, with so many people bidding up the obvious long-side trade, going contrarian may yield the better risk-reward proposition.

Notably, the put/call open interest ratio for Bed Bath & Beyond is 0.56, conspicuously below the common delineation point of 0.70. Therefore, more people are buying calls than puts, implying current bullish sentiment. However, without fundamental support, the narrative could possibly sour quickly on BBBY stock.

This Time It’s Different

While it’s always risky to presume that circumstances will pan out differently from prior norms, an inherent risk exists in participating in the latest swing higher for BBBY stock. For starters, the meme-driven equities dynamic has a very short history. It’s more than possible that in the grand scheme of things, memes could merely become a blip on the radar.

Second and more importantly, fundamentally negative catalysts impose sharp headwinds on Bed Bath & Beyond and other consumer-facing companies. A few days ago, The Wall Street Journal warned readers that investors should avoid assuming that the present fresh momentum in meme stocks will yield similar results to what folks saw during the heady period of 2021.

In particular, fears of multi-decade high inflation combined with brewing recession concerns have been “confounding professionals and rookies alike on where the stock market might go from here.”

One of the best cases against getting too comfortable with the bull trade for BBBY stock is the declining purchasing power of the dollar. In all of 2021, the currency erosion amounted to a 6% magnitude. However, just in the first half of this year, purchasing power declined by 5.3%.

To be fair, the latest read from the consumer price index shows that prices increased by 8.5% (in July), an improvement from 9.1% in June. However, with the most recent jobs report indicating wage growth pressures, the Federal Reserve is likely to act aggressively with its tightening policy.

That could very well spark an economic downturn, which wouldn’t augur well for a struggling retailer.

Interesting But Fraught with Risk

While the euphoria over BBBY stock represents a sort of comeback for meme trades, the fundamental reality for the underlying company has changed dramatically. Not only are regular folks struggling with economic-related pressures, the federal government is no longer supporting Americans with stimulus programs. With the punch bowl taken away, skepticism should be investors’ north star.

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