A year ago, I recommended a speculative options trade on big box retailer Bed Bath & Beyond. At that time, its share price was hovering around $3 as the company struggled to remain solvent.

I did not believe Bed Bath and Beyond would be able to avoid bankruptcy. However, I thought it might become a target of “meme stock” traders hoping to induce a short squeeze before the stock was delisted.

Although that did not happen, the stock shot up for a few weeks when it appeared the company may be acquired by a competitor. As a result, the call option I recommended in December could be closed out for a 100% gain in February.

Two months later, Bed Bath and Beyond finally threw in the towel. The company filed for bankruptcy and its stock was delisted.

However, Bed Bath and Beyond lives on. To be more accurate, its name lives on. In June, a bankruptcy judge approved the purchase of the company’s brand name, intellectual property, and ecommerce platform by Overstock for $21.5 million.

At the time, I thought that was a questionable move by Overstock. Especially when it changed its name to Beyond (NYSE: BYON) and adapted the Bed Bath and Beyond brand name for its ecommerce business.

The stigma of bankruptcy can last a long time. Especially on Wall Street, where embittered shareholders of Bed Bath and Beyond were left holding worthless stock.

But that didn’t stop them from piling into the new company when this deal was announced. After bottoming out below $18 in May, BYON more than doubled in value over the next two months.

Stepping Inside the Kill Zone

As you can see in the chart above, Beyond’s share price surge didn’t last long. A few months later, BYON was back below $20.

Had you bought the stock in May and sold it in August, you would have doubled your money. Over the same span, the S&P 500 Index rallied 10%.

That’s a great result, but you could have done a lot better. Had you bought a put option on BYON when it peaked in August and sold it two months later, you could have booked a profit of around 500%.

That’s not a typo. A put option increases in value when the price of the underlying security goes down. And when the price of a stock drops in half in just a few months, put options can soar in value.

When a stock suddenly soars in value on little more than optimism, that is what I refer to as the “kill zone.” That’s because it is only a matter of time until something sends the stock over a cliff.

That something could be a disappointing quarterly report, a class-action lawsuit against the company, or an unexpected geopolitical event. Regardless of the reason, Wall Street is quick to beat a hasty retreat as soon as it realizes it made a mistake.

In this case, Wall Street overestimated the beneficial impact this deal would have on the company’s financial performance. That became apparent when Beyond released its fiscal 2023 Q3 results in October.

During the third quarter, the company’s total net revenue was 19% less than the year before. Its operating loss of $41 million worked out to an adjusted/diluted net loss of 61 cents per share.

Putting the Squeeze On

Already, there is talk of bankruptcy in Beyond’s future. Short interest in the stock is close to 15%, which means the so-called “smart money” on Wall Street believes the company will eventually go under.

I’m not so sure about that. Beyond has over $300 million of cash, which is more than seven times its total debt of $40 million. And just a few days ago, the company announced that its sales over the five-day period from Thanksgiving through Cyber Monday were 24% higher than last year.

At the same time, Beyond said it as “initiated a fixed cost restructuring plan targeting approximately $25 million of annualized reductions by early 2025.” That equates to roughly 12.5% of the company’s trailing twelve-month expense run rate.

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If Beyond can maintain that positive momentum, the bears on Wall Street that are shorting the stock may decide to close out their positions before it goes much higher. That could produce the “short squeeze” that I was expecting a year ago for Bed Bath and Beyond.

If that happens, then we may be able to double our money again on essentially the same company. The call option for BYON that expires on January 19 at the $22.50 strike price could be bought for $2.50 a few days ago.

For this trade to make money, BYON must rise above $25 within the next six weeks. If the company’s holiday sales in December are as strong as they were in November, this year’s trade might be more profitable than last year’s gamble on the company formerly known as Bed Bath and Beyond.

Editor’s Note: Jim Pearce just described what a “Kill Zone” trade is and how you can profit from it. Now, he sees an opportunity to close out another three “Kill Zone” trades for big gains. If you’d like to find out more about them, click here.