Recommending a bullish put write on Target (NYSE: TGT) right now might seem strange.
Most investors are a little skittish about making big moves while geopolitical risks are elevated. Specifically, the conflict between the U.S. and Iran after the assassination of Qassem Soleimani put some investors into a holding pattern.
They’ve pushed into safe-haven commodities like gold.
But as the U.S.-Iran situation has played out, the market has started to calm down. Despite the uncertainty around the situation, the major indexes are holding near recent highs.
Iran’s response was relatively restrained, and the U.S. retaliated against Iran’s missile strikes with economic sanctions. The S&P 500 responded by rallying just under 0.5%, and that jump gives us the confidence to take on a little more risk with our trade recommendations.
Why Retail?
The banks will start releasing quarterly earnings reports next week, and we are expecting relatively good news. The bullish momentum in the market is pointing towards a strong fourth quarter in the financial sector, which is usually a good leading indicator for retail.
In the past, we’ve recommended trades on Starbucks (NASDAQ:SBUX), Nike (NASDAQ:NKE) and The Walt Disney Company (NYSE:DIS) as a way to take advantage of bullishness in retail stocks. TGT falls into the discount retail portion of the sector though, and this seems like an ideal time to open a new trade in the discount retail space.
We see signs that the discount retail sector may be undervalued this month. The Institute for Supply Management (ISM) released its non-manufacturing purchasing managers’ index (PMI) earlier this week, and it was above expectations, which is usually followed by stronger than expected retail sales data.
We also think the December labor report coming out tomorrow could provide a boost.
The November numbers were way above expectations, which led to a slightly lower estimate for December’s numbers — a “reversion to the mean.”
In our opinion, that revision has been too extreme. If the employment and wages data are above expectations, retail should move higher in the short term. If more consumers have jobs and higher wages, they have more money to spend at places like TGT.
An Opportunity as TGT Approaches Support
As mentioned above, many discount retail stocks look undervalued. Stocks like TGT are coming down after a strong holiday shopping season.
In the chart below, you can see that TGT is near support around $123. Because we’re hoping tomorrow’s labor report will help boost TGT, we don’t want to set a strike too close to that level. A strike set at $120 would provide a small cushion for traders looking to sell puts on TGT.
Daily Chart of Target Corporation (TGT) — Chart Source: TradingView
TGT won’t report earnings until March 3, but that doesn’t mean traders should look for later expirations just yet. After all, we still want an opportunity to roll out the trade for more income if TGT starts to rise.
By looking at put writes with expirations in late January and early February, we can ensure that we don’t commit to this trade for too long. If tomorrow’s labor report doesn’t provide the boost we’re looking for, there is still plenty of time for TGT to head higher.
InvestorPlace advisers John Jagerson and S. Wade Hansen, both Chartered Market Technician (CMT) designees, are co-founders of LearningMarkets.com, as well as the co-editors of Strategic Trader.
