I have to admit, I don’t understand the fixation with pillows. Walk through an open house, and it’s a safe bet that every bed will be staged with a pyramid of colorful pillows that can only interfere with actually getting a good night’s sleep. That’s bad news for those of us that have to throw all but one or two of those pillows on the floor every evening just to restack them the next morning, but good news for the companies that sell them. 

However, like for much of the retail sector, the past few years have been brutal on home furnishings retailer Bed Bath & Beyond (NasdaqGS: BBBY). The threat Amazon.com (NasdaqGS: AMZN) poses to its business model has driven its share price down about 75% since peaking near $80 in December of 2014.

The good news is, recent developments in the retail sector suggest that the worst is now behind it. This year, other traditional “bricks & mortar” retailers also presumed to be Amazon roadkill have rallied including Macy’s (+35% in one month), CVS (+18% in three months), and Tiffany (+31% in five weeks).

So why do I believe that BBBY is about to stage a similar turnaround?

From a fundamental perspective, it’s cheap. Priced at 10 times forward earnings and less than one times book value, most of the near-term risk is fully priced into the share price. Despite its recent woes, Bed Bath & Beyond still makes money with a profit margin higher than the industry average.

From a technical perspective, it’s showing signs of strength. BBBY bounced off its lower Bollinger Band in early May and crossed over its 50DMA (fifty-day moving average) two weeks ago. At the same time, its RSI (relative strength index) has crept up near its highest level this year, suggesting it is gaining share price momentum at an accelerating rate.

This trade will generate immediate income of at least $125 per contract now, with the possibility of buying Bed Bath & Beyond at a 2% discount to where it currently trades if the stock gets put to you. Investors should set aside $2,000 per contract sold to buy the stock in case the option expires in the money.

Regardless of how many contracts you sell, it’s absolutely critical that you follow the instructions below, particularly when it comes to setting the limit order.

How to Make the Trade:

• Trade: Sell to open the August 17, 2018, $20 Put on BBBY.
• Allocation: Sell one put for every 100 shares you would be pleased to buy at $20 per share.
• Prices:
  • Current Stock Price: $20.35
  • Limit Order Price: a credit of $1.25 or more.
  • Tell your broker: “I want to sell a put on Bed Bath & Beyond (NasdaqGS: BBBY) stock. Specifically, I want to ‘sell to open’ one August $20 Put for a credit of $1.25 per share or more.”

• Further Instructions Regarding the Trade:
  • If the option price changes, you can adjust our recommended limit based on the midpoint of the bid/ask spread, which you should be able to see when entering the trade. Just make sure the potential credit is at least $1.25 per share or more.
  • Place your limit order on a “good ‘til canceled” (GTC) basis and be patient.

The Win-Win Situation: 

For every put contract you sell, you will collect at least $125 that’s yours to keep no matter what happens in the future.

If the put expires worthless, meaning the stock price is above $20 per share at expiration, then we’ll do another trade to create another instant payment.

If the stock is trading at or below the strike price upon the contract’s expiration, then you’ll be buying BBBY at a 2% discount to the current market price, while locking in a yield of 3.3% — plus the premium you pocketed when you sold the put.

Then we’ll collect the dividend while creating more instant payments by selling covered calls against the stock.