Capitalizing on Target’s High Implied Volatility

The one thing that has been consistent on Wall Street during the past week-and-a-half is volatility. One day the market is up, the next day it’s down, the next day it’s up and on and on it goes.

We’ve been holding shares of Target Corporation (NYSE:TGT) since February, and the back and forth in the market has given us an opportunity to sell a call option against our stock.

Retail stocks were doing well earlier this week, and we think the Federal Reserve’s emergency rate cut will benefit the sector. In fact, we believe many retail stocks are oversold.

But while we wait for TGT to resume its push higher, we want to take advantage of all the volatility in the market.

Selling Calls Against TGT After Earnings

An unpredictable and volatile market like this can be frustrating and nerve-wracking, but it also provides an opportunity.

You see, when implied or anticipated volatility increases, option premiums increase as well. Premiums increase because option sellers demand more compensation for the risks they are taking by selling the options, and option buyers are willing to pay more for the anticipated profits they could make if the underlying stock makes a big move in the future.

This is exactly what is happening with the options on TGT.

Traders aren’t sure where TGT is going to move in the future, so implied volatility is high right now compared to where it usually is. This means the option premiums are more expensive than they usually are, which is great news for us.

TGT’s fourth quarter earnings weren’t stellar, but its mixed performance was enough to keep it above $100 per share.

If you recall, TGT dropped in January because the company announced that it had low Christmas sales. So, it’s not surprising that TGT’s revenue failed to meet expectations, but its worth noting that TGT did beat earnings expectations.

Investors looking at TGT’s performance once the market settles may view it as a bargain, which would lead them to push it higher. That potential, along with the already high implied volatility, means selling TGT call options is lucrative.

Preparing for TGT’s Push Higher

We originally purchased TGT common stock for $120 per share, so if we sell a covered call against our long stock, we want to ensure we won’t receive less than that.

If TGT were to rise above the strike price of our call, we would have to sell the stock at the strike price. If we set it at $120, we ensure that we will break even on the stock if it is called away at expiration.

As mentioned above, TGT’s earnings report was enough to keep it above $100 per share, and though a call option with a strike price at $120 is far out of the money at TGT’s current price, the volatility in the market means we can still collect a decent premium by selling the option.

In the chart below, you can see that TGT developed some resistance at around $118 per share in January. We don’t think it will cross above that level in the short term.

Daily Chart of Target Corporation (TGT)  — Chart Source: TradingView

Instead, we’re hoping TGT can resume its gradual drift higher once the market calms down. In order to get a decent premium on a covered call with a strike set at $120, traders will need to look at April expirations. As always, you want to avoid committing yourself to the position for too long.

InvestorPlace advisers John Jagerson and S. Wade Hansen, both Chartered Market Technician (CMT) designees, are co-founders of, as well as the co-editors of Strategic Trader.

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