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Why BBBY Stock Rally May Be Far From Over

Bed Bath & Beyond shares have been skyrocketing in recent weeks. Here's why the rally may not end anytime soon.
  • Bed Bath & Beyond's stock has been a hot topic on Reddit.
  • The open interest for BBBY's options chain indicates the retailer's share price should remain high.
  • Market makers are unlikely to hamper any more short squeezes, thanks to regulatory scrutiny.
Figure 1: Why BBBY Stock Rally May Be Far From Over

Figure 1: Why BBBY Stock Rally May Be Far From Over

(Read more from Wall Street Memes: BBBY Stock: Meme Season Has Begun)

Backed by Reddit's r/wallstreetbets

Reddit's r/wallstreetbets (WSB) subreddit is probably the most influential online forum when it comes to retail investors. The subreddit is notorious for its participation in the "meme-stock frenzy" of January 2021, when short squeezes in GameStop  (GME) - Get GameStop Corporation Report and other beaten-down stocks sent shares skyrocketing.

In recent weeks, Bed Bath & Beyond  (BBBY) - Get Bed Bath & Beyond Inc. Report has been increasingly popular among r/wallstreetbets users. This is likely connected to recent short squeezes in BBBY. Check out this chart below, which illustrates sentiment for the stock on WSB:

Figure 2: BBBY sentiment on WSB.

Figure 2: BBBY sentiment on WSB.

But the stock's popularity is also growing on Reddit as a whole. Currently, BBBY is the most frequently mentioned stock on the social media site, beating out popular meme stocks like GameStop, AMC Entertainment  (AMC) - Get AMC Entertainment Holdings Inc. Class A Report, and Tesla  (TSLA) - Get Tesla Inc. Report.

Figure 3: Trending stocks on Reddit on August 15.

Figure 3: Trending stocks on Reddit on August 15.

Bed Bath & Beyond's Options Chain Open Interest

Open interest — the number of outstanding options contracts — is a good indicator of the level of activity in the options market. It can be used to measure the value of options contracts that have been created but not yet closed.

When looking at open interest for Bed Bath & Beyond's options chain, it's possible to see a correlation to the company's recent bullish moves.

On Friday, August 5, as the stock hit $8.16 per share, open interest call options were at roughly 37,100, leading BBBY shares to jump almost 40% the following Monday.

A week later, on Friday, August 12, open interest increased to about 62,800 call option in-the-money contracts. That was nearly double what we saw on August 5, the previous expiration date. BBBY shares closed the week 18% higher.

Looking further ahead, open interest for call options expiring on January 20, 2023, is over 305,000, with strike prices from $8 to $80.

Notice that, for the $80 strike, open interest is at 84,811.

Figure 4: BBBY Jan 2023 call option.

Figure 4: BBBY Jan 2023 call option.

A substantial increase in open interest implies that more money is being deposited in the market. This can indicate that the current trend — in our case, BBBY's stock rally — will continue for some time.

Brokerage Firms and Market Makers Have Been Warned

After January 2021, the U.S. House Committee on Financial Services began investigating the participants of the so-called "Meme Stock Market Event."

As part of the investigation, the committee expressed concern about the role of market makers in the trading of GameStop, AMC Entertainment, and other highly volatile stocks.

Payment-per-order-flow brokers such as Robinhood  (HOOD) - Get Robinhood Markets Inc. Report have been facing accusations of market manipulation. This is due to the restrictions these brokers imposed during last year's "stock meme" rally, when retail investors allege Robinhood removed the "Buy" button.

The year-long investigation also revealed that, during the Meme Stock Market Event, commission-free broker Robinhood exhibited problematic business practices involving inadequate risk management and a culture in which it prioritized its growth over the stability of the markets.

The committee found that, before the event, Robinhood was unprepared to comply with regulatory capital obligations. That led it to limit its clients' access to the stock market.

It's likely that brokers and market makers are now paying more attention to their practices than ever before. Thus, should an event similar to the Meme Stock Market Event occur again, it is unlikely that these brokers will block trades.

(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting Wall Street Memes)