Tuesday, November 17, 2015

TGT Analysis

Update 12/3/2015: A couple of weeks out from expiration, my TGT position's condition is that it loses if the price goes down further. I'm bearish the markets overall because of the likelihood that the Federal Reserve will raise interest rates soon. So I've decided to accept a small win and get out of harm's way.

The stock declined by 1.88% over 16 days, or a -43% annual rate. The options position produced a 30.0% yield on debit for a +684% annual rate.

The retail chain Target Corp. (TGT), headquartered in Minneapolis, Minnesota, publishes earnings on Wednesday before the opening bell.

[TGT in Wikipedia]


I shall use the DEC series of options, which trades for the last time 31 days hence, on Dec. 18.


Implied volatility stands at 42%, which is 2.4 times the VIX, a measure of volatility of the S&P 500 index. TGT’s volatility stands in the 96th percentile of its annual range.

Ranges implied by options and earnings
WeekSD1 68.2%SD2 95%Earns
Implied volatility 1 and 2 standard deviations; maximum earns move

The Trade

The Zacks chart has been in a downtrend since late June, with the most recent leg down having begun on Nov. 4.

Zacks Investment Research, in its freely available information, gives a bullish assessment of TGT, with a neutral rank of 3 and a 1.16% chance of an upside earnings surprise. The Zacks rule goes that it requires a rank of 3 or less combined with a positive earnings surprise prediction to trigger a directional trade.

Analysts in aggregate have a -10% enthusiasm rating, which is bearish but barely so.

Zacks says that its Earnings Surprise Prediction has 70% accuracy in predicting positive surprises, so I give it great weight. I shall directional bull position although, given the downtrending nature of the chart and indeed of the market as a whole, I shall try to provide additional protection to the downside.
Bull put spread, short the $70 puts and long the $67.50 puts,
sold for a credit and expiring Dec. 19.
Probability of expiring out-of-the-money


The premium is $0.52, which is 21% of the width of the position’s wings. The stock at the time of entry was priced at $73.52.

The risk/reward ratio is 3.8:1.

The strike price is $3.52 below the market price.

The biggest immediate move after each of the past four earnings announcements was $4.99, and the average was $1.51.

However, those numbers are high because of a very large move after the November 2014 earnings announcement.

Tossing the outlier, the remaining three earnings announcements had a largest immediate move of 57 cents and an average of 34 cents.

Decision for My Account

By placing my short strike further away from the at-the-money point I've created downside protection of $3.43. While that range is narrower than the maximum post-earns movement of the past year, that maximum range was an outlier among much narrower moves. The trade structured provides multiples of downside protection compared to the prevalent post-earnings price movements.

I have opened a position on TGT as described above.

-- Tim Bovee, Portland, Oregon, Nov. 17, 2015


Tradecraft: Playing the odds to build winning stock market trades from options, a description of how I trade, can be read here.


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Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decisions for his or her own account, and take responsibility for the consequences.

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Based on a work at www.timbovee.com.

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