At the end of June we took a look at the trade set up in Target (TGT) and weighed the potential for a gap fill. Thought process being that the stock offers a healthy dividend yield above 3%, trades at a reasonable valuation relative to its peers, and below the market, had very poor sentiment and gets 100% of its sales from the U.S. Unlike a lot of the other high yielding stocks in sectors that are now arguably crowded trades (telecom, utilities etc) TGT had sort of been left for dead after an earnings induced decline in May. Our feeling was TGT had the opportunity to play catch up. Here was the way we expressed that view:
So what’s the trade?
We’re going to use the upcoming long Holiday weekend as an opportunity to finance an August at the money call. We’ll sell a slightly higher July 8th weekly call and if that expires worthless, continue to roll to further reduce the cost of the August call:
*TGT ($70) Buy the July 8th weekly 72 / August 70 call diagonal call calendar for $2.15
- Sell to open 1 July 8th weekly 72 call at .25
- Buy to open 1 August regular 70 call for 2.40
Break-evens/ Rationale – This trade does best if the stock creeps higher towards 72 in the next week and a half. If that is the case the the short call strike can be rolled, either keeping a calendar by selling a shorter dated call or establishing an August vertical that captures earnings by selling a higher strike call in August expiration.
-Risk exists of the stock goes significantly lower and if the stock were to gap higher above 72 before July 8th.
-The position starts at about 30 deltas but that will increase into July 8th if the stock is here or higher.
The July 8th calls did expire worthless and now with the stock 73.80 the August calls are worth about 4.25 and are well in the money and 75 deltas. Since the trade is basically a double, it could make sense to just take the profits and move on. But we’re gonna see how this acts around its 200 day average and buy some time by turning it into a vertical spread in August, and reducing our overall premium risk. So here’s the update:
Versus 1 August 70 call with a cost basis of 2.15 (currently worth 4.25) sell to open the August 76 call at .75
New Position – TGT ($73.80) Long the August 70/76 call spread for 1.40 (currently worth 3.50)
Rationale – TGT is currently finding some resistance at its 200 day moving average just above 74:
[caption id="attachment_65115" align="aligncenter" width="662"]
6 month TGT from Livevol Pro[/caption]
If the stock can hang on here it could get above that moving average and give us the opportunity to make up to 4.60 vs the 1.40 we currently have at risk. If it fails to do so we’ll keep a stop towards the downside where we’ll be able to exit the position as a nice winner. Spreading here buys us time to assess which is more likely.