Event: Target (TGT) reports Q2 results tomorrow before the open. The options market is implying about a 3% one day move which is a tad rich to the 4 qtr avg of about 2.5%.
Price Action / Technicals: TGT is up 5% ytd, and down about 7% from its all time highs made in late June.The stock’s average price for 2015 is about $80, just about where it is trading now. The year chart below shows the stock holding key support at $79, which also corresponds with the stock’s 200 day moving average (yellow):[caption id="attachment_56224" align="aligncenter" width="600"] TGT 1yr chart from Bloomberg[/caption]
There is little support below current levels for another $4 to $5.
Sentiment: Despite the stock’s strong performance over the last year, up almost 405 from the 52 week lows made last August, analysts remain fairly mixed on the stock with 12 Buy ratings, 16 Holds and 2 sells with an average 12 month price target of about $84, below the recent highs.
Our View: options prices appear to be fairly reasonable when you consider HD’s 2.5% gain and WMT’s 3% decline today. At the very least, on a directional basis for those who would consider protection, or replacing stock, the at the money call or put, with the stock at $80 is about $1.20, or about 1.5% into an event, it doesn’t frequently get much cheaper than that.
What’s clear in U.S. retail is that there are haves and have nots. Those that have benefited from lower oil at the pump (TJX), those that have seen those benefits gobbled up by the strong dollar (WMT), those that are immune to anything macro (HD) and those that can’t buy a basket (RL).
Rather than choose an individual name, we prefer to focus on the sector as a whole, which appears to be in a little downtrend after not confirming the new highs in the broad market since late March. Looking at the one year chart of the XRT (the S&P retail etf), we like the idea of playing for a re-test of support at 95 in the coming weeks:[caption id="attachment_56226" align="aligncenter" width="600"] XRT 1yr chart from Bloomberg[/caption]
So here is the trade:
XRT ($97.18) Buy Sept 100 / 95 / 90 Put Fly for 1.75
-Buy to open 1 Sept 100 put for 3.70
-Sell to open 2 Sept 95 puts at 1.125 or 2.25 total
-Buy to open 1 Sept 90 put for .30
Break-Even on Sept Expiration:
Profits: up to 3.25 between 98.25 and 91.75 with max gain of 3.25 at 95
Losses: up to 1.75 between 90 and 91.75 & between 98.25 and 100 with max loss of 1.75 below 90 and above 100.
Rationale: XRT is showing signs of waning momentum with $95 an obvious level to return to if it can’t break the downtrend. This trade targets that area while beginning in the money and therefore not susceptible to decay. If the index does indeed break above its downtrend on a broader market rally. we’ll look to take the trade off defensively