Name That Trade – $TJX: To the Maxx

by CC September 17, 2015 1:52 pm • Commentary

To suggest that it’s been a stock-pickers market in the retail space in 2015 has been an understatement.  Walmart (WMT) down 25% ytd, while Target (TGT) is up 3.5%. Under Armour (UA) up 55% and Lululemon (LULU) down 3%.  Kroger (KR)up 17% and Whole Foods (WFM) down 33%. Macy’s (M) and Khols (KSS) down 15% and TJ Maxx (TJX) up 6% ytd.  You get the point.  There have been plenty of good reasons for the disperse results, secular shifts in businesses, dollar exposure, financial health of different sorts of consumers, but the fact of the matter is, it’s been hard to just paint the entire sector with the same brush as the XRT (the S&P Retail etf) is down 1% on the year, and down 7.5% from its 52 week high made in March.

Which leads me to one of the out-performers, TJX. In late August, just prior to the U.S. stock market’s swoon, the company report Q2 results and offered guidance for Q3 that was better than expected, and the stock broke out to a new all time high:

TJX 1yr chart from Bloomberg
TJX 1yr chart from Bloomberg

Prior to the August breakout the stock had spent most of the year trading between $65 on the downside and $70 on the upside. Barring another market meltdown like late August, TJX looks poised to take a run at the prior highs.

While short dated options prices were clearly bid in TJX in late August, then have since come in more than 30% from their one year highs, with 30 day at the money implied vol now at 22%.  

[caption id="attachment_56952" align="aligncenter" width="600"]TJX 1yr chart of 30 day at the money implied volatility from Bloomberg TJX 1yr chart of 30 day at the money implied volatility from Bloomberg[/caption]

I suspect option prices don’t have much too far more to go in the current vol environment, and one could make the argument that they can be bought to express directional views.  But in TJX, options are tough. Until next week there is only Oct and Jan options listed, and most traders would prefer to target November expiration as it will catch the next identifiable catalyst, Q3 earnings.

With the stock at $72.70. the Jan 72.50 straddle (the call premium, plus the put premium) is offered at about $7.80, if you bought that, thus the implied move for the stock between now and Jan16 expiration you would need an almost 11% move in either direction.

If the stock were to settle a bit in the low $70s we would be inclined to take a look at earnings plays once Nov options are listed next week.