Bed Bath & Beyond Stock Soars Amid Meme Stock ‘Gamma Squeeze’ As Bankruptcy Risk Intensifies

Bed Bath & Beyond shares are up more than 67% over the past five days, pressuring investors who’ve bet against the struggling home retailer.

Bed Bath & Beyond  (BBBY) – Get Free Report shares surged higher again Wednesday, leading a renewed rally for so-called ‘meme stocks’ on Wall Street even as the struggling retailer continues to warn about a possible bankruptcy filing.

Bed Bath & Beyond posted a wider-than-expected third quarter loss of $393 million Tuesday, as sales fell 33% from last year to $1.26 billion, and said it’s exploring “multiple paths” in its turn around strategy while accelerating plans for store closures and cost-cutting.

Still, shares in the group have rallied more than 70% over the past five days, with heavy trading in the options market, following a warning from CEO Sue Gove that the group could file for Chapter 11 bankruptcy protection in the coming months.

Stock holders typically get nothing from Chapter 11 filing, as the courts consider them company owners rather than creditors, although turnaround experts will sometimes carve out a small portion of the recovery for equity investors as a gesture of good will – particularly if they want those same investors to buy stock in the entity that exits the Chapter 11 process. 

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Bondholders are taking an entirely different view on its prospects, even through they sit much further up on the list of creditors likely to recover assets in the event of a Chapter 11 filing, with traders pegging its $300 million paper maturing in August of 2024 — which carries a coupon of 3.749% — at just $7.52 per $100. 

Standard & Poor’s said earlier this week that Bed Bath & Beyond, while not in “active default”, remains highly vulnerable to the “virtual certainty” of a restructuring. The ratings company said that’s based on its “deteriorating liquidity position, challenging operating conditions, and the looming maturities” of its debt pile. 

Bed Bath & Beyond shares were marked 50.5% higher in late-morning trading Wednesday at $3.12 each, after hitting an intra-day high of $3.46 earlier in the session, with nearly 100 million shares changing hands. 

Short interest in Bed Bath & Beyond shares remains elevated, as well, with bets around the group pegged at around 51% of the group’s outstanding shares as institutional investors dump the stock amid bankruptcy risk.

Action in the options market were noted on social media as a possible driver for the stock’s recent move, with increased activity reported at strike prices of $3.50 linked to Bed Bath & Beyond shares. 

A call option buyer has the right, but not the obligation, to own shares of a company at a certain price at some specified point in the future. He or she might think owning a call option on Bed Bath & Beyond with a $3.5 strike price, when shares are trading at $3.10, is a better way to play the stock’s momentum.

Options sellers, meanwhile, will often buy the underlying stock in the open market as its price moves higher, in order to hedge their risk, creating a virtuous, but potentially ephemeral, circle of ever-higher prices in what is often referred to a ‘gamma squeeze’.

 

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