Options Corner: Even TJX Companies Call Spreads Are Offered At A Bargain

While Wall Street is celebrating the possibility of positive economic negotiations, the sentiment boost can be a bit of a nightmare for options traders. With the whipsaw effect, there's a strong likelihood that long or bullish contracts are overpriced, effectively meaning that speculators must pay a heftier premium for their wagers. There is a case to be made, though, that TJX Companies Inc TJX, offers one of the most sensible propositions.

Frankly, TJX stock is about keeping things simple. On the fundamental front, the underlying enterprise — which specializes in off-price fashion — is essentially resistant to recessions and tariffs. Of course, it's not marketed as such, but investors can read between the lines. With consumers likely to drive into discount-price leaders, the retailer is ideally positioned under the present economic and political context.

On a technical level, TJX stock generally moves in a stepwise fashion: it rises, enters a sideways consolidation as it gains strength, then moves onto the next leg higher. Therefore, the speculation is that the equity is on the tail end of its current consolidation pattern.

Adding to this concept is the likelihood that the market has largely digested the implications of “Liberation Day,” the sweeping wave of tariffs imposed on multiple economic partners. Sure, the magnitude of the levies was higher than analysts expected. At the same time, the tariffs are now old news.

Moving forward, investors will anticipate the market's next move. Since consumers being more price sensitive is an accepted reality, TJX stock commands a logical basis for rising from here on out.

TJX Stock Arguably Offers the Most Compelling Math

As stated earlier, the jolt of upside enthusiasm may be good for the "normals" of Wall Street but it can be terrible for options traders. Now, call options are overpriced, with market makers anticipating the good times to come rolling in. Put another way, because the odds of upside are perceived to be strong, long speculators must pay a larger premium for their wagers.

Under this environment, it's extremely difficult to find debit-based strategies that carry characteristics of credit spreads, a phenomenon I termed risk inversion. Instead, the next best approach is to consider the best deal the market is willing to give long-side speculators.

Certain bull call spreads — transactions that involve the interplay of long and short calls to create a "discounted" net bullish position — for TJX stock meet the above requirement. Statistically speaking, TJX commands an upward bias. Using data over the past six years, a position held for one week will rise 55.66% of the time. These odds generally improve with the passage of time.

Not only that, but under the positive scenario, the weekly returns of TJX stock are surprisingly robust, coming in at about 2%. That's all that's necessary to leverage the power of multi-leg options strategies — such as the bull call spread — to extract sizable rewards.

This is also the reason why speculators need to be careful under jubilant conditions such as now. With call options overpriced, bullish traders are lulled into paying a "premium-plus." It's not just meeting the strike price target that is the challenge; rather, it's the heightened premium on top of that strike price that makes long positions so expensive today.

Therefore, the takeaway isn't that TJX stock is the greatest deal ever. Instead, the argument is that it offers the most sensible long-side transaction under present circumstances.

Quick Scalps Available for Swing Traders

An aggressive but tempting idea to consider is the 120/123 bull call spread expiring this Friday. This transaction involves buying the $120 call (at a time-of-writing ask of $291) and simultaneously selling the $123 call (at a bid of $99), resulting in a net debit paid of $192, which is also the most that can be lost in the trade.

The idea here is for TJX stock to hit the $123 short strike price at expiration. If so, it would trigger the maximum reward, which is the difference between the strike prices (multiplied by 100 shares) minus the debit paid, or $108. This translates to a maximum payout of over 56%. It's risky but sensible considering that today's high was $124.87.

Another approach is to consider the 120/124 bull spread expiring next Thursday, April 17. What's tempting here is the max payout of just over 73%. Further, over a two-week period, TJX stock should land somewhere around $124, assuming the positive scenario.

Since the retailer is well-positioned for the current economic chaos, the positive outcome materializing is a rational proposition.

Read Next:

• Short Seller Sees 25% To 40% Downside In Monster Beverage Shares: ‘Vulnerable To Escalating Threats’

Photo: Shutterstock