While still planning to trade cautiously, we believe traders have an opportunity to open a position in Target (NYSE:TGT) because of last week’s “debate” over whether Thursday’s unemployment claims number or manufacturing report was more important.
Both news releases have issues, but historically, the Philadelphia Federal Reserve’s manufacturing report has been a much more reliable indicator for where the market will be in the short-term (flat or higher) than the choppy unemployment claims numbers.
A Look at the Philadelphia Fed’s Release
Because the Fed’s manufacturing data tends to be less “noisy,” (and less subject to frequent revisions) we decided to focus on it over the unemployment claims, which were worse than expected. The Philadelphia Fed’s manufacturing index jumped from negative territory to a positive 27.5.
This is a sentiment indicator, so it shows that manufacturers are more confident than pessimistic about the year despite a big decline in activity during the second quarter. And just before the Philadelphia Fed released its reading, the Federal Reserve Bank of New York released a slightly less positive — but still dramatically improved — reading for its manufacturing index.
It may feel a little strange to focus on manufacturing confidence when contemplating a bullish position on a discount retailer like TGT, but the two are generally quite correlated. A better outlook for manufacturing translates to more positive estimates for unemployment and spending, which is supportive of retail in general.
TGT’s New Support at Around $115
Even a quick glance at TGT’s chart shows just how well the company has done during the COVID-19 pandemic. As an essential retailer, it has remained open for business, and thanks to steady improvements in its online services, it has been able to reach customers in myriad ways.
But a closer look shows that the stock has established support between $115 and $116, which would make an excellent strike price for a put write position.
Daily Chart of Target Corporation (TGT) — Chart Source: TradingView
By selling a put write with a strike just under that support level, traders can net a surprisingly high premium.
Inflated option prices like this gives you a good hedge against downside by lowering your breakeven price to the strike price minus your premium.
For example, if you sold the TGT puts for $3.00 with a strike price of $115, your breakeven price would be $112 at expiration. That means that even if TGT dropped to $112 and the option expired in the money, you would still have broken even on the position, despite having to buy 100 shares of TGT.
This isn’t likely to be a long-term opportunity so traders should take advantage of it while they can.
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.