Trade Idea – $TJX: Maxx for the Minimum

by Dan November 16, 2015 2:31 pm • Commentary

Event: TJX Companies (TJX) reports Q3 results tomorrow before the open. The options market is implying about 8.5% one day move, which is massively rich to its 4 qtr average one day move of 3.4%.

Price Action / Technicals:  After the last two week’s 14% shellacking in sympathy with many of its retail peers, TJX is now down 6.5% on the year, and down about 17% from its all time highs made in mid August following its better than expected Q2 results.

Over the last two years TJX has traded between a low of near $52 in July of 2014, and high of just below $77 in August. The stock’s recent decline has placed the stock right at the mid-point of that range at $64ish, , which also happens to be an important technical level, where the stock broke out late last year to then new highs:

TJX 2 yr chart from Bloomberg
TJX 2 yr chart from Bloomberg

On a longer term basis, going back to the throes of the financial crisis, the stock bottomed at about $9 in late 2008, and had a fairly healthy 7 year 45% angle rise of nearly 750% at recent highs. The stock has held the uptrend like a boss, and now threatening a test:

TJX 7 year chart from Bloomberg
TJX 7 year chart from Bloomberg

Implied Volatility Snapshot:  Options prices have blown out to post financial crisis highs, and well above this summer’s vol spike, with 30 day at the money implied volatility nearly double the one year average:

TJX 2yr chart of 30 day at the money Implied Volatility from Bloomberg
TJX 1yr chart of 30 day at the money Implied Volatility from Bloomberg

Options Open Interest: total options open interest is skewed towards calls (37,000 to 30,000 puts), the four largest strikes of open interest are all calls with 9,900 of the Nov 67.50 calls the single largest strike, followed by 2500 to 300 of the Nov 72.50s, Jan16 75s and Jan16 77.50 calls.

My View:

Unlike some of its retail peers, TJX was rising for the better part of 2015 as a result of beating prior comp store guidance, and consistently guiding up, per The Motley Fool:

At the beginning of the current 2016 fiscal year, it projected that comparable-store sales would rise 1%-2% for the full year. However, strong sales trends encouraged TJX to lift its full-year comp sales growth guidance to 2%-3% in May and then to 3%-4% in August. Comp sales increased 5% in Q1 and 6% in Q2, so this guidance could still be conservative.

In the wake of the department store carnage of the last couple weeks, TJX has been lumped into the bunch (DDS, JCP, JWN & M all down about 20%).  The logical take-away is that TJX might have been somewhat immune to the inventory issues that the dept stores have had of late as they are buying their excess inventory and might have had greater discipline as they witnessed second had what appeared to be an emerging trend throughout the year.

TJX is not exactly cheap trading 19x expected current year’s earnings growth of 5%, and 17x next year’s expected earnings growth of 12%.

I for one would be surprised to see TJX be immune to some of the adverse trends affecting bricks and mortar retailers, and suspect that a relief rally will be sold, if it were to occur.  A miss and a guide down and the stock likely has another 10% to 15% on the downside, which would place it down 20% or so on the  year, in line with many of its peers.

Potential Trades:  Long premium directional trades looked challenged with options prices where they are, you could get the direction right but most likely lose if you don’t get the magnitude of the move or the timing right. We find the trade set up difficult at best.

Long Stock Alternative: If you are inclined to play for a short term bounce, a reasonable target would be in line with the implied move of a little more than $4 which would place it at its 200 day moving average at $69.

In lieu of 100 shares of stock:

TJX ($64.40) Buy the Dec 65/70/75 call fly for $1

Rationale – Recent history has shown that investors are shooting first and asking questions later in the retail space, especially after earnings misses and guide downs. This trade reduces the downside risk to $1 and targets a realistic move to the upside if TJX has been able to avoid some of the inventory issues we’ve seen from other stores. The risk to the upside is a move substantially higher than $70 where profits begin to trail off, but the stock probably finds sellers above that area. Additionally since this is December, profits to the upside won;t be realized immediately so this is reducing deltas substantially in order to define your risk. So it’s not an earnings play that will pay off immediately like stock to the upside. It will take a few weeks to realize all those profits if the stock was near 70.


Bearish/ Hedge:  If you think the stock were to test the 52 week lows down near $60, which also happens to be in line with the implied move, then you might consider the following trade:

TJX ($64.40) Buy the Dec 65/55/45 put fly for 2.30

Rationale – This fly targets a big move down to 2014 lows. This is for those worried about/or betting on a complete roundtrip. As a hedge this will protect fairly close to the money but again, since it’s December those gains on the fly won’t be immediately realized and will take a few weeks. But the risk reward of 2.30 to 7.70 with a breakeven at 63.70 to the downside (just below where the stock is trading into the print) makes this a good trade structure with vol so high as it starts with the stock below its highest strike.