6 Shots at the Bullseye

Target, $TGT reports earnings tomorrow morning before the market opens. The daily chart below shows that it has made a series of higher lows since the August bottom with a couple of higher

highs. Recently there has been some consolidation as it hovers near the 50% retracement of the move from the January high to the August low. The Relative Strength Index (RSI) is holding in bullish territory but testing the mid line, while the Moving Average Convergence Divergence (MACD) indicator is improving. The shorter Simple Moving Averages (SMA), the 50 and 100 day, are sloping higher and price is above all three. There is resistance higher at 53 followed by 54 and 55.25 before the gap higher to 57.65. Support lower comes at 52 followed by 51.25 and then 50. And it has held up very well given the general market weakness the last 2 days. The weekly chart shows a $6 rising channel with all of the SMA underneath and the 20 week SMA rising through them. It also shows some strong support at 49 below. The RSI could be stronger and the MACD is positive but fading slowly, but it is a bullish bias on this timeframe as well.

Moving to the options board the at-the-money Straddle (52.50) $1.85 move by Friday or 3.5% making a range of 51.03-54.73 with the stock at 52.88 as I write this. Implied volatility at 48% in the November contract is elevated over the historical at 27.5%, so we can expect it to fall after the announcement. Finally the move after the past 5 reports has averaged 3.3%, nearly the same as implied by the at-the-money Straddle. With the wide Strike prices there are few alternatives for a trade.

Long Bias Trades

Trade Idea 1: Buy the November 52.5 Call
Plain and simple but risks the entire premium of about $1.08.

Trade Idea 2: Buy the November 52.5/55 Call Spread
Buying the November 52.5 call and selling the November 55 Call to make the Call Spread for a net debit of about 84 cents. This is the safest of the 4 long trades.

Trade Idea 3: Buy the November 52.5/55 Call Spread Risk Reversal selling the November 50 Put
Adding the Put sale at 14 cents reduces the debit of trade 2 to 70 cents.

Trade Idea 4: Buy the November 52.5/55 Call Spread and fund it selling the December 50 Put
Selling the December Put for 71 cents reduces the cost to a net debit of 13 cents, but prolongs your exposure to the downside another month. This is the riskiest of the 4 long trades.

Volatility Trade

Trade Idea 5: Sell the November 52.5 Straddle
Selling both the 52.5 Call and Put looking to buy them back cheaper after the report and assuming the move is muted.

Trade Idea 6: Sell the 50/55 Strangle for November
Selling both the November 55 call and the November 50 Put, assuming it will stay within that range and you get to keep the full premium of about 38 cents. This is the safer of the two volatility trades.

Selling naked Puts for funding or otherwise exposes you to owning the stock if it closes below your Strike Price on Expiry. To avoid this either buy back the Put on a drastic move lower, hedge by short selling the stock, or cap the risk by buying a Put of a lower Strike.

Trade Idea 7: Added at 3;13pm, If you were too slow like me another option is buying the 55/57.5 Call Spread and selling the 50 Put all in November for a debit of about 20 cents.

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The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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