Strangle TGT and Let Volatility Do Its Thing

by John Kmiecik | September 30, 2013 6:15 am

Don’t know where the market is going next? Well, you’re certainly not alone. In a market like this, sometimes the best thing to do is take a break from trading until you have a clearer picture. The following trade idea on Target (TGT[1]) can profit no matter which way the stock moves … just as long as it moves enough.

Target (TGT — $63.94): Long Strangle

The trade: Buy the TGT Jan 65 call and the Jan 62.5 put for $3.90 or less.

The strategy: A strangle is when a call and a put are generally bought one strike OTM with the same expiration. Strangles are volatility spreads — when a strangle is bought, it is done in the expectation of a big move either up or down. In effect, an options trader has an opinion about volatility … just not the price. The maximum profit on a strangle is theoretically unlimited because the stock can continue to rise forever or pretty much fall to zero. Breakevens of this particular play on Target stock are at $68.90 and $58.60 at expiration based on a cost of $3.90. The maximum loss is $3.90 or whatever was paid for the strangle if TGT finishes between $62.50 and $65 at January expiration, as both options would expire worthless.

The rationale: Like many retailers in this current economy, the future still is unknown. Is the economy going to accelerate like some indicators would have you believe, or are things going to remain somewhat chilly as we head into the holiday season?

U.S. retailers’ holiday hiring is expected to be less than last year’s level. TGT is one retailer that’s trying to take chances to improve profits. Target just recently launched a digital video service, and it also launched a free baby goods subscription plan. Will TGT’s new strategies pay off? Only time will tell — and that is why there could be some volatility up ahead for Target stock.

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Taking a peek at a one-year chart of Target stock, TGT has traded as low as $58 in the beginning of the year and as high as $73 back in July. Currently, TGT is trading almost right in the middle of the highs and lows for the current year.

Whether these strategies turn out to be good or bad for Target is inconsequential for this trade idea to profit. All this trade needs is for the stock to test those highs or those lows.

The sooner the better!

As of this writing, John Kmiecik did not hold a position in any of the aforementioned securities. Get a free trial of John’s live options trading room here[2].

  1. TGT:
  2. free trial of John’s live options trading room here:

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