Retailers released their monthly sales figures for March on Thursday, and in most cases, the numbers were positive, to say the least. Target (TGT) came out with stronger-than-expected sales results and raised their earnings guidance, a one-two punch for the Target bears.
The positive news falls on a crowd that has been increasingly bearish toward the stock lately, as identified by a number of indicators that factor into our proprietary Earnings Risk Index.
The latest options activity has seen a heavy increase in the number of puts trading on TGT, indicating that the options “crowd” has been making an increasingly large number of bearish bets on the stock. Similarly, short interest on TGT has been on the rise, as short sellers have been adding to their bearish positions on the stock.
Why is this good? Well, the increased bearish activity signals two things.
First, investors have been lowering their expectations for TGT as its earnings report approaches in early May. Lower expectations make it easier to impress the Street.
An old boss always said to under-promise, and then outperform. In this case, the under-promise has already been put in place, and now TGT is beginning to outperform, meaning that all of those bears are going to start covering their bearish bets and begin buying the stock.
We like this setup to drive the price of TGT toward $60 between now and their earnings report on May 10. On that day, who knows what’s going to happen, but if all goes well, we’ll be closing out a profitable position before that announcement hits the tape.
I like the TGT May 57.50 Calls (TJB 100522C00057500), which are currently trading for around $1 per contract.
If the price of TGT were to run to $60 before the company’s earnings announcement, this option would be worth at least $2.50, or a profit of 178%. Not bad for getting out before the earnings news even hits the wire.
We’ll keep an eye on this trade for you over the next few weeks and follow-up with its progress.
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