Event: Target (TGT) reports Q1 results tomorrow before the opening, the options market is implying about a 3.5% one day move, which is well above the 4 qtr avg of about 2.5%, which includes a 7.4% rally back in November when the company issued better than expected results prior to the holiday season.
Price Action / Technicals: The stock is up a little less than 3% on year, and down 7% from the all time highs made last month. In the near term, $75 should serve as near term support, while the prior high of $84 as fairly healthy resistance:[caption id="attachment_53789" align="aligncenter" width="600"] TGT 1yr chart from Bloomberg[/caption]
On a longer term basis, the longer term basis $70, which was the prior breakout level should serve as long term support:[caption id="attachment_53790" align="aligncenter" width="600"] TGT 10yr chart from Bloomberg[/caption]
Volatility Snapshot: Short dated options prices are elevated into the print as expected, but below or at the levels of the last four earnings reports. 30 day at the money implied vol should retreat back towards the mid teens following the print:[caption id="attachment_53791" align="aligncenter" width="600"] TGT 1yr chart of 30 day at the money IV from Bloomberg[/caption]
MY VIEW: Walmart’s disappointing results and guidance this morning, and the stock’s subsequent 4% decline is obviously weighing on the retail sector. Last week shares of TGT were particularly hard hit after worse than expected results from Kohls (KSS), falling 3% in sympathy.
The company has had a long fought turnaround, along with its stock price since the woes of the massive data breach that rocked TGT’s consumer’s confidence for much of 2014. Management is now focused on cost cuts, which includes firing workers, not hiring new ones, shutting down unprofitable stores and regions all together, and of course buying the crap out of their stock, to the tune of $5 billion between now and the end of 2016.
As for the quarter, there are few positives to extrapolate from the likes of KSS, URBN, WFM and WMT, but companies like this that are in the midst of a turnaround, it can be hard to gauge sentiment shifts. Given the stock’s recent under-performance to the broad markets, much in sympathy with peers I think it is safe to say that expectations are not particularly high. So on the flip-side you never know what sort of rabbit a company immersed in a focused turnaround can pull out of its hat.
Here are a couple ways I would consider playing if I had a strong directional inclination:
If I were to play for a bounce inline with the implied move I would consider the following trade:
Bullish: TGT ($78) Buy May 22nd weekly 77.50 / 80 / 82.50 Call fly for .65
Break-Even on Friday’s Close:
Profits: between 78.15 and 81.85, max gain of 1.85 at 80
Losses: up to .65 between 78.15 and 77.50 & between 81.85 and 82.50, with max loss of .65 below 77.50 or above 82.50
If I were inclined to play for a pull back I would target (yep) the $75 level and would consider the following trade:
Bearish: TGT ($78) Buy May 22nd weekly 78 /75 / 72 Put fly for .70
Break-Even on Friday’s Close:
Profits: between 77.30 and 72.30, max gain of 2.30 at 75
Losses: up to .70 between 78 and 77.30 & between 72 and 72.70, with max loss of .70 below 72 or above 78
Rationale: in both cases listed above I would want to risk as little premium as possible with break-even well within the implied move. Both trades risk less than one percent of the underlying stock price. As always we caution long premium directional trades into event such as earnings as you need to get a lot of things right just to break-even, like direction, magnitude of the move and timing.