The hype on Target Corporation (NYSE:TGT) is getting a bit out of hand this week. TGT stock was a considerable value play back in November when the shares were trading in the upper $50s. Furthermore, Target stock’s dividend yield of 3.67% remains a considerable draw. But the shares have come too far, too fast.
Case in point, TGT stock jumped 3.65% yesterday following news that Amazon.com, Inc. (NASDAQ:AMZN) could buy the company this year. The arguments for such a buyout appear to make sense. Amazon has a wealth of cash and a desire to increase its presence in the brick-and-mortar retail space. Last year’s acquisition of WholeFoods Market emphasizes that last point.
But Amazon will not buy Target for multiple reasons.
First, Amazon is still struggling with the WholeFoods integration. A culture clash is a big reason for this, and Target would be another headache that Amazon doesn’t need.
Second, big mergers are not as easy as many think. The Department of Justice is already suing to prevent the merger of AT&T Inc. (NYSE:T) and Time Warner Inc (NYSE:TWX). On a more related note, regulators also blocked the Staples and Office Depot Inc (NYSE:ODP) merger. With this in mind, there’s no way they would let Amazon buy Target.
Remove the possibility of an Amazon acquisition, and TGT stock is still worth investing in for its growth potential in 2018. That said, the recent hype has pushed the shares to the verge of overbought territory.
During 2017, TGT stock reached overbought status three times. Each time, the shares sold off sharply, with support arriving near Target’s 50-day trendline.
A similar decline this time around could easily see TGT stock pullback to the $63 region before meeting up with support in the area. A breach of $63 would put TGT stock down near $60, the current location of its 50-day moving average.
Despite the recent euphoria surrounding Target, TGT stock options traders have yet to join in the rally. Currently, the Jan 2018 put/call open interest ratio rests at 0.89, with puts and calls on the verge of parity in the front-month series.
Furthermore, TGT stock is trading north of all major call accumulations in January, with the $65 and $67.50 being the most popular. In other words, profit taking following the recent run up is very likely.
Overall, January 2018 implieds are pricing in a potential move of about 5.1% for TGT stock ahead of expiration. This places the upper bound at $71.50, while the lower bound lies at $64.50. With TGT stock already overextended, I don’t see the shares topping $70. A pullback to $64.50, however, appears well within the realm of possibility.
Bear Put Spread: The path of least resistance for TGT stock lies to the downside once the Amazon hype subsides and profit taking kicks in. Traders looking to profit from a correction might want to consider a Jan 2018 $65/$66 bear put spread. At last check, this spread was offered at 32 cents, or $32 per pair of contracts.
Breakeven lies at $65.68, while a maximum profit of 68 cents, or $68 per pair of contracts — a potential return of about 110% — is possible if TGT stock closes at or below $65 when January 2018 options expire.
Put Sell: Those looking for a more conservative play might consider a Jan 2018 $63 put sell position. Such a trade would be banking on former support at $63 keeping this put out of the money. At last check, this put was bid at 44 cents, or $44 per contract.
As always, the upside to this put sell strategy is that you keep the premium as long as TGT stock closes above $63 when January 2018 options expire. The downside is that if TGT trades below $63 ahead of expiration, you could be assigned 100 shares for each sold put at a cost of $63 per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.