TGT option trade idea
From CNBC's option show, they suggested putting on the following trade to play TGT's earnings announcement this week. The premise is that the bad news should be out after TGT missed the last couple of quarters and that anything that is not showing them getting worse should provide a bounce in the stock.
Technically, the stock bottomed around twice in June (double bottoming?) and has made a nice recovery to $172, breaking through the 50 dma on the way up. RSI is 67, so not quite overbought yet. The 200 dma is at 210 and 205 is where the large gap was from when they missed last quarter. In other words, if that gap is filled, that's where some sellers will emerge to take profits.
We have seen this happen with several other stocks that reported less than good earnings, but showed their stocks bounce.
Here's their trade (they suggested the strikes before the market closed, so one might have to adjust them).
Sell the Aug 26 $160 put (currently 3.65), buy the Aug 26 $175 call for $6.40 and sell the $190 call for $2.
The net outlay is about $1 (so $100 per contract) and gives you participation in upside from 175 to 190 (15 points) and downside risk below $160. So that's a risk reward of 15 to 1 with a margin of safety of 12 points.
I have not used this type of strategy before and generally stay away from playing earnings announcements since it's hard to predict what can happen. But the CNBC options guys said it was better than risking $175 to buy TGT stock.
There are many other retailers reporting earnings this week so one could see how the market reacts to any misses to see if they have already priced continuing not so good news.
I'm not particularly wedded to retail stocks, but I did buy some DG and sell an in the money call with 1 month to expiration for what seemed like a large premium for 1 month. There's a guy on the other board (robolive) who does this with all of his trades with good results while protecting his downside.