Back in May we took a look at beaten up retailer Target (TGT) and highlighted a defined risk, low cost way to play for a second half of the year rebound in the shares. Here was the original trade, from May 19th:
TGT ($56) Buy July / Oct 60 Call Calendar for $1
-Sell 1 July 60 call at 55 cents
-Buy 1 Oct 60 call for 1.55
At the time, the stock was $56. Nearly a month later we checked back in on the trade idea after TGT got slammed to the 50 level, but then started to recover a bit after the company upped its second quarter sales forecast. With the stock 53.15 we updated the original losing trade to better align the strikes with where the stock was trading. This roll lower serves two purposes, one is to make the trade more realistic, the other is to be able to make up some ground on the losses more quickly if the stock got back towards our original entry spot. Here was the roll, from July 13th:
TGT (53.10) Sell to close the July/Oct 60 call calendar at .55 (for a .45 loss)
Buy to open the Aug/Oct 57.5 call calendar for .60 (1.05 net)
- Sell to open the Aug 57.5 call at .40
- Buy to open the Oct 57.5 call for 1.00
Rationale – This only adds .05 in risk to the original trade but has a much better chance of success to get back to even or make money.
As you can see, this was a case where we could re-establish the calendar for next to no additional risk. It has worked well as the stock is slightly higher and most of the original losses have been recaptured. Now with the stock 55.75, this calendar is worth about .90, gaining .30, turning a trade that had lost .45 into one that is now about a .15 loss, and one that could be profitable if things work out from here.
Of course, TGT reports earnings on Wednesday. So let’s check in on the trade as is. As noted, the trade is worth .90, and the short August call is about 1.75 away on the upside. The current expected move is about 2.50, which puts the strike within the range to the upside. Therefore it’s a fairly aggressive fade of the earnings move itself. If the stock went higher in line with the implied move it would likely be profitable, but a move up towards 60 and it would risk losing all its current profits and possibly become a loser.
So for those worried about that outcome (in other words, those pretty bullish into earnings, it probably makes sense to close the August short call and look to roll that out (e.g the Oct 60 calls are .65 bid, meaning the roll would further reduce risk). For those happy to target slightly higher on the event, the current position is looking higher, just not looking for fireworks to the upside, and if the stock were to get hit and go lower, it is of course still defining risk.
The ideal situation for the current trade is a move higher to 57.50 at which point the August calls could be closed, rolled farther out, setting up a bullish position out to October at a very low cost.