Trade Alert: Betting Against A Budget Retailer

One up more than 50% in recent weeks despite awful fundamentals.

This retailer’s 40% off sale is reminiscent of Bed Bath & Beyond’s perennial 20% off coupons.

Weak Technicals And Fundamentals

This is one from my bearish screens set up on Chartmill. It’s got an aggregate fundamental rating of 3 (out of 10), a profitability rating of 0, and a Piotroski F-Score of 2 (out of 9).

Last time it released earnings, it missed on revenues and posted a much wider than expected loss. Despite that, it’s up more than 50% in recent weeks, apparently due to a short squeeze.

On the technical side, this stock scores a 2 out of 10 overall.

My bet here is that it gives back some of its recent gains over the next couple of months.

Details below.

The company is Big Lots (BIG 0.00%↑), and this is the trade: a vertical spread expiring on September 15th buying the $10 strike puts and selling the $7.50 strike puts for a net debit of $1.15. The max gain on 3 contracts is $405, the max loss is $3.45, and the break even is with BIG trading at $8.85.

Exiting This Trade

For each debit spread trade, I’m opening a Good ‘till Canceled limit order to close it at a net credit of about 90% of the spread (the difference between the strike prices of the options). Here, we have a $2.50 spread ($10 - $7.50), and 90% of $2.5 is $2.25, so that’s where I’ll be placing my limit order to exit it. If that order doesn’t get filled over the next few months, I’ll lower the limit price as necessary as we get closer to expiration.