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Morning Update


Last night rumors that a Spanish bailout would occur in the near future strengthened, tightening Spanish and Italian bond yields to bunds. Even after the rumors that Spain would seek a bailout this weekend we denied risk-on sentiment remained. The Euro is now trading near the psychologically important 1.30 level and US equities are pointing towards a higher open. Yesterday the market also looked strong early on but gave back nearly all of its gains by the close. A strong close higher today will take some momentum back from the bears, while another reversal will only encourage more near-term selling.
Yesterday we noticed unusual options activity in Best Buy. Someone sold 22,500 BBY Oct. 19 calls for $0.25 and bought 15,000 Nov. 19 calls for $0.90. This trade appears to be someone rolling their long Oct. calls forward into November. The Nov. calls will turn a profit if the stock is above 19.90 at expiration, which would require a 17% move from yesterday’s close. Best Buy has seen declining sales as customers have shifted more of their purchases online to retailers like Amazon. However, founder Richard Schulze still has faith in the company and is attempting to raise money to take Best Buy private. Schultze has voiced interest in paying $24-26 per share, which would put the total buyout price around $8 billion.
If a buyout is announced BBY shares are likely to jump into the mid-twenties. However, short of that happening I don’t see any catalysts for significant share appreciation. This is a speculative trade that has the risk of losing the entire amount invested, but also has the chance of huge returns should Schultze surprise the market. Implied volatility in BBY options is well above realized volatility and looks expensive, so I will be watching the action in Best Buy from the sidelines.

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