Big Lots Stock Resumes Slide After Double Downgrade

The shares hit a five-year low last Thursday

BofA-Merrill Lynch slapped Big Lots, Inc. (NYSE:BIG) with a double downgrade, dropping its rating on the retail stock to "underperform" from "buy." The brokerage firm also nearly halved its BIG price target, to $23 from $45 -- a discount to last Friday's close -- saying the company's full-year forecast is too optimistic, and the shares will likely struggle until earnings growth improves.

In reaction, BIG stock is down 4.4% to trade at $26.40, closing in on its five-year low of $25.73, tagged last Thursday. While the retail shares rallied more than 6% on Friday thanks to the company's first-quarter adjusted profit beat, they ran headfirst into their descending 10-day moving average. Longer term, the security has slumped more than 33% since its mid-April test of the round $40 region.

Options traders have been positioning for a Big Lots bounce. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock's 10-day call/put volume ratio of 3.23 ranks in the 86th annual percentile, meaning calls have been bought to open over puts at a quicker-than-usual clip.

However, it's possible that some some of these long calls have been initiated by short sellers looking to hedge against any upside risk. Short interest on BIG stock rose 4.1% in the most recent reporting period to 7.46 million shares, which accounts for almost one-fifth of the equity's available float.