Tomorrow before the opening Target (TGT) will report their fiscal Q1 earnings. The options market is implying about a 5.5% one day move which is a tad shy to the 6% average one day move following the last four earnings reports.
With the stock near $72.50, the May 24th weekly 72.50 straddle (the call premium + the put premium) is offered at $4, if you bought that, and thus the implied move for earnings you would need a rally above $76.50, or a decline below $68.50 by Friday’s close to make money, or about 5.5% in either direction.
Shares of TGT are up 10% on the year, and very near the mid-point of the one year range, with the all-time high at $90 in September and the 52-week low near $60 over Christmas. From a technical perspective the chart is truly in no man’s land:
Despite TGT actually outperforming big-box rival Walmart’s (WMT) 8% year to date gains, WMT’s chart has a slightly more healthy look and feel in a well-defined uptrend and only about 4% from its all-time high made last year:
Shares of TGT trade at about 12.4x expected fiscal 2020 eps growth of 9% on 3% expected sales growth, with it’s PE trading very near a 10 year low:
Wall Street analysts are very mixed on the stock with only 10 Buys, 17 Holds and no Sell ratings with an average 12-month price target of $86.50, below the prior high.
So what’s the trade? A month ago the stock was trading above $80 looking to be poised to make a move back to the prior highs, and then BANG, Amazon.com (AMZN) dropped a bomb that they are cutting free shipping for Prime members in half, from two to one day. This move will obviously pressure competitors margins as they have already announced similar moves. I would not expect to see potential adverse effects in TGT’s guidance just yet, but I would expect to see a battle royale into back to school and the holiday season which despite high consumer confidence readings retailers will have to weigh how quickly they can get products to customers while also absorbing or passing through the costs of tariffs in what is likely to be a protracted trade dispute with China.
If I were inclined to make a bullish bet into the print playing for a 5.5%ish move in line with the implied move I might consider the following call spread:
Bullish Trade Idea: TGT ($72,50) Buy May 24th weekly 72.50 – 77 call spread for $1.50
-Buy to open 1 May 24th weekly 72.50 call for $2
-Sell to open 1 May 24th weekly 77 call at 50 cents
Break-even on May expiration:
Profits of up to $3 between 74 and 77 with max gain of 3 at 77 or higher
Losses of up to 1.50 between 72.50 and 74 with max loss of 1.50 below 72.50
Rationale: this trade idea breaks even up 2%, or less than half of the implied move and has a max gain up 6% if the stock is u a little more than the implied move.
Or If I were inclined to play for a miss and a guide lowe I might consider the following trade idea:
Bearish Trade Idea: TGT ($72.50) Buy May 24th weekly 72.50 – 68 put spread for 1.50
-Buy to open .1 May 24th weekly 72.50 put for $2
-Sell to open 1 May 24th weekly 68 put at 50 cents
Break-even on May 24th weekly expiration:
Profits of up to 3 between 71 and 68 with max gain of 3 at 68 or lower
Losses of up to 1.50 between 71 and 72,50 with max loss of 1.50 at 72.50 or higher.
Rationale: this trade idea risks 2% of the stock price with a breakeven down 2% with a max payout of 2x the premium ar risk in 3 trading days if the stock is down in line with the implied move.
** Important to note that short-dated long premium directional trades into earnings events can be very binary, you need to get a lot of things right to merely break-even, first and foremost direction, but also timing and magnitude of the move. The trade-off for those convicted on the direction is the defined risk nature of trades ideas like this. But usually, when trading earnings events traders should risk what they are willing to lose.