Back in mid-March, we laid out the bullish case for shares of Target (TGT) following their Q1 earnings results and forward guidance:
At the time when the stock was $71.25 we detailed a call diagonal calendar, selling a shorter dated out of the money call to help finance the purchase of a near the money longer dated call… here was the trade idea:
Shares of TGT are trading $75.30, the short leg of this trade idea expired a few weeks ago and it is now worth discussing how to manage the trade with the long July 72.50 call sufficiently in the money, worth about $4.95 for a decent profit from the trades original $3 outlay.
Let’s consider our options:
- take the profit by selling to close the July 72.50 call
- sell a higher strike call in July making a vertical call spread. For instance, could sell the July 80 call at 1.40, reducing the premium at risk to 1.60 leaving you long the July 72.50 / 80 call spread for just 1.60 which could be worth 7.50 if the stock was 80 or higher on July expiration.
- roll the profit into another defined risk trade idea.
Consider the fact that the company will report their Q2 results next Wednesday after the close I think it makes sense to go with #3.
Action: TGT ($75.30) Sell to Close July 72.50 call at 4.95 for a 1.95 profit
New Trade Idea: TGT ($75.30) Buy to open July 75 / 85 call spread for $3 (or a debit of $1.05 on the roll)
-Buy to open 1 July 75 call for 3.50
-Sell to open 1 July 85 call at 50 cents
Break-even on New Trade Idea including roll:
Profits of up to 8.95 between 76.05 and 85 with max profit of 8.95 above 85
Losses of up to 1.05 between 75 and 76.05
Rationale: The roll adds a minimal amount of premium while allowing for significant gains between now and July expiration targeting the prior all-time highs near $85 while also including an earnings catalyst. The profit of the first trade allows for the roll, in this case, to have a very near the money participation with a very attractive risk-reward potential.