Target Corporation (NYSE:TGT) stock peaked two years ago. Unfortunately it was part of the retail stock avalanche and has since fallen over 40%. Consensus is that this is not a stock specific issue, but rather a sector-wide phenomenon. At the heart of the problem is Amazon.com Inc. (NASDAQ:AMZN).
I think blaming AMZN solely for the demise of a whole sector is ludicrous. Brick-and-mortar retail had ten years to adjust to the threat. Now they are frantically playing catch-up. And when they are scurrying around they are likely to do a bad job at it.
To make matters worse, TGT has had its fair share of flubs. No, I am not here to schedule the funeral for Target stock. But I do want to highlight the prevailing investor fears. But this can be an opportunity for premium sellers.
Where there is fear, there are high premiums. When others are scared about a doomsday scenario, I see opportunities to create income. Provided I can find support levels that are likely to hold. Otherwise, I am liable to own TGT stock.
From a price-earnings perspective, Target stock isn’t expensive … and it pays a dividend. Analyst expectations are moderate as they mostly have it as a hold. Price-book is under three, so it’s not likely to be a massive mistake to temporarily own the shares should my trade go wrong.
Technically, since TGT stock is bumping at extreme lows. The monthly chart shows price is now trading almost exactly in the middle of the last 17 years range. So I will assume that price is close to being in balance, yet I will still leave a healthy downside buffer just in case.
A healthy buffer does not change the fact that today’s TGT setup is speculative. I accept the fact that I could end up owning the shares. I would not mind holding them temporarily and then managing out of the risk with minimal damage if things don’t go my way.
The Bet: Sell TGT Jan 2018 $45 put and Collect $2.50 to open. This is a bullish trade that has a 75% theoretical chance of success. But if price falls below my strike then I will own the shares and accrue losses below $42.50. Ideally I want TGT stock to stay above $45 this year, so I could retain maximum gains.
Target reports its earnings in August. I don’t like going into that event while short naked puts. So I will eventually buy sacrifice puts to guard against the crash scenario just in case they have a hideous story to tell us.
Selling options is risky business especially into the retail sector, so I make sure to risk only what I can afford to lose.
Learn how to generate income from options here. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernic and stocktwits at @racernic.