Option strategies for Target (TGT) after earnings, upgrade

Target (TGT) options strategies Everyone’s favorite bullseye-themed discount store, Target Corporation TGT, has been in a short-term slump. From its August 9 high of $53.70, the shares have retreated nearly 7%. This decline has brought the shares below its 50-day and 200-day simple moving averages, which themselves are now in the process of crossing bearishly. + of 2% to 4%. Things could be looking up, however, as the company reported second-quarter earnings this morning. Profit rose 14% as cost cutting helped offset the disappointing same-store sales growth. Target earned 92 cents per share, matching estimates.

These factors didn’t dissuade Bank of America/Merrill Lynch, who boosted its outlook on the retailer on Tuesday. The firm lifted its rating to “buy” from “neutral” and moved its price target up to $61 from $57. The covering analyst noted that Target’s credit portfolio looks less risky and opined that a new 5% off promotion could drive more traffic into the stores. The firm is also enthusiastic about Target’s inclusion of more grocery and perishable items.

For investors curious about including option strategies in their portfolio, we’ve outlined two potential option strategies below. First is an upside short straddle targeting about 5% of potential upside through the next month. Next, for the bears, is a bear put spread, which will acheive maximum profit potential if TGT moves even fractionally lower between now and September expiration.

Keep in mind that these are not buy/sell/hold recommendations, merely examples of various strategies for educational purposes. The prices are taken as of Wednesday’s close, when TGT shares were trading at $51.95, up $1.27 on the day.

Bullish Option Strategy: Short Upside Straddle

For those who expect modest upside in Target shares through the short term, a short straddle could be a strategy to consider. The September 52.5 straddle (buying both the 52.5-strike call and put) can be sold for a net credit of $3.01, collecting $1.79 for the put and $1.22 for the call.

Because the short put is in-the-money, delta is overall net positive. At the time of entry, delta for the short straddle is roughly positive 8, meaning increases in the stock should result in fractional gains for the straddle (and the opposite is true for declines in the stock).

At expiration, the maximum potential gain is the $3.01 credit collected. The investor keeps this if TGT expires right at the 52.50 strike. Between $49.49 and $55.51 (the strike price minus and plus the credit), the short straddle is in positive territory.

Losses are unlimited with a short straddle if the stock rallies. If the stock were to decline all the way to zero, the loss is capped at zero in the stock (however a loss of $49.49 may feel pretty unlimited to most options traders). Remember at expiration a straddle strategy can only lose in one direction. The chart below was created with the profit/loss calculator, one of many tools in a virtual trading account.

Target (TGT) short straddle

Bearish Option Strategy: Bear Put Spread

Investors who have a skeptical outlook toward TGT could buy a near-the-money put spread. The September 52.50/50 long put spread (buying the 52.50-strike put, selling the 50-strike put) can be purchased for a net debit of $1.00. This is the most the trader can lose (before commissions) if TGT is able to gain ground and has moved above $52.50 when the options expire.

The most a trader can earn, on the other hand, is $1.50, or the difference in strike prices less the debit paid. This maximum profit occurs if TGT is below the short put strike (50) at expiration. Return on risk for this spread is 150% in just over four weeks. The investor will break even at $51.50; anywhere below this level, the spread will theoretically be profitable at expiration on September 17.

Target (TGT) bear put spread