A burst of recent shopping has been quickly returned by investors in Target Corporation (NYSE:TGT) following a mixed earnings report this week.
But if you’re interested in piling on as a TGT stock bear, stick with a well-placed, below-market long put butterfly spread. It still has a bulls-eye to shot for, but won’t deliver a black eye if bulls take it squarely on the chin. Let me explain.
An aggressive shopping spree in front of Wednesday’s confessional from Target ,which saw shares jump higher by 10% over six trading sessions, proved to be less of a bargain than many investors obviously hoped for. Following the authoritative bid, and one punctuated by a fourth breakout attempt to new highs, shares are now off 6.6% on the week and have taken back the bulk of the overly hopeful and less-than-prescient activity.
Behind the about-face in TGT stock, the company’s slight weather-based profit miss and margin concerns trumped a return to earnings growth, an improving digital presence, exclusive product launches and brick-and-mortar makeovers helping drive stronger traffic and sales.
For their part, analysts mostly cheered TGT’s “strong Q2 start” as a sign today’s investors are being nearsighted following the report. At the same time, you can’t say those selling shares are still blind to a wall on the Target price chart
Target Weekly Price Chart
Even with this week’s sell-off in TGT stock, shares are still in an uptrend. Calling the chart pattern friendly, though, is another matter open to discussion. Bearing that in mind, this strategist sees Target’s four unsuccessful attempts at breaking out over the past year as a wall of resistance that needs to be respected until proven differently.
TGT Stock Moderately Bearish Put Butterfly Spread
One way to respect the wall, until and if proven differently, is to go short TGT stock using a modified and bearish, long put butterfly. This strategy offers bearish traders a way to get short with limited and vastly reduced risk. Also key, there’s the potential for healthy profits without worrying about seeing red, figuratively and literally, if shares tumble below the spread’s lowest wing.
Reviewing the TGT options board, one spread of interest is the 29 June $68.50/$65.50/$63 put butterfly for 35 cents. With shares at $70.94 this combination will require a decline of $2.79 or roughly 4% at expiration to break even.
Below the breakeven of $68.15, the spread captures profits dollar-for-dollar as TGT stock declines all the way down to $65.50. A max profit of $2.65 exists if, under perfect conditions, shares finish at $65.50 on expiration.
Lastly and unlike a traditional long put butterfly, if TGT falls even harder below $63, the debit paid up front will be money very well spent with no questions asked. Bottom line, rather than a loss that may or may not seem equitable, a profit of 65 cents can still be taken to the bank.
Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.
