If you were looking for a chance to get in on Target Corporation’s (NYSE:TGT) recent rally, the market selloff has handed you an excellent opportunity. Furthermore, Target is set to release its fourth-quarter earnings report in less than a month, providing a potential bullish driver for the shares.
Target stock price action has been impressive since December. The company has benefited from the Republican tax plan as well as solid turnaround efforts. Additionally, TGT shares have had an added speculative driver in that many analysts believe Amazon.com, Inc. (NASDAQ:AMZN) may buy the company this year.
I don’t put much stock in Amazon buying Target, but Target stock has certainly shown it’s worth paying attention too. Prior to the market selloff, TGT had gone on a 39% bull run off it’s November lows. The shares were in the process of consolidating those gains into support near $75 when the market took a sharp turn south.
Click to EnlargeAs a result, Target stock is no longer overbought. The shares found support near $72 amid the selloff, and are now looking to stabilize before moving higher once again. Earnings may very well be the driver for just such a move.
Currently, analysts are expecting a profit of $1.37 per share from Target. Revenue is expected to rise 8.8% year-over-year to $22.51 billion.
Despite Target stock’s recent rise, bearish sentiment still dominates the shares. According to Thomson/First Call, only four of the 26 analysts following Target stock rate the shares a “buy” or better. Additionally, the 12-month consensus price-target of $73.84 rests just above the stock’s current trading range.
Upgrades and/or price-target increases are clearly a possibility following a solid quarterly report.
Elsewhere, short interest could be a factor in a Target stock post-earnings rally. Currently, following an 11% increase in the most recent reporting period, some 47 millions TGT shares are sold short. This represents a sizeable 8.6% of Target’s total float, and could drive a short-covering rally.
Judging from Target’s options configuration, short sellers are either nervous, or speculative TGT traders are bullish. The March put/call open interest ratio for Target stock currently rests at 0.43, with calls more than doubling puts among options most affected by the company’s quarterly report.
Overall, March implieds are pricing in a potential post-earnings move of about 9.7% for Target stock. This places the upper bound at $79.50, and the lower at $65.50.
2 Trades for Target Stock
Call Spread: Traders looking to bet on a rebound for Target stock, might want to consider a March $72.50/$75 bull call spread. At last check, this spread was offered at 92 cents, or $92 per pair of contracts. Breakeven lies at $73.42, while a maximum profit of $1.58, or $158 per pair of contracts — a potential return of 71% — is possible if Target stock closes at or above $75 when March options expire.
Put Sell: On the other hand, volatility is rising and pushing options prices higher with it. If you are not comfortable making a bullish bet on Target stock, then a more neutral put sell options might fit the bill. The March $62.50 put sell has quite a bit of potential for staying out of the money.
At last check, this put was bid at 71 cents, or $71 per contract. As always, the upside to this put sell strategy is that you keep the premium as long as Target stock closes above $62.50 when March options expire. The downside is that if TGT trades below $62.50 ahead of expiration, you could be assigned 100 shares for each sold put at a cost of $62.50 per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
