Shares declined by 5.4% over eight days, or a -244% annual rate. The options position produced a 100.0% yield on debit for a +4,583% annual rate.
The general merchandise retailer Target Corp. (TGT), headquartered in Minneapolis, Minnesota, publishes earnings on Wednesday before the opening bell.
[TGT in Wikipedia]
TGT
I shall use the SEP series of options, which trades for the last time 31 days hence, on Sept. 16.
Ranges
Implied volatility stands at 26%, which is double the VIX, a measure of volatility of the S&P 500 index. TGT’s volatility stands in the 24th percentile of its annual range. The price used for analysis was $75.34.
| Week | SD1 68.2% | SD2 95% | Earns |
|---|---|---|---|
| Upper | 81.00 | 86.85 | 77.10 |
| Lower | 69.68 | 64.03 | 73.58 |
| Gain/loss | ±$5.66 | ±$11.31 | ±$1.76 |
The Trade
TGT has traced three legs of a zig-zag since June 2015 and on May 19 began a fourth leg, to the upside. It remains below the peak of the prior leg, so the nature of the most recent uptrend remains ambiguous.
Brokers in aggregate give TGT a -7% enthusiasm rating, with 47% of 15 analysts issuing strong buy recommendations.
TGT's price rose on the trading day following publication of three of the last four quarterly earnings reports.
The brokers are at edge with past earnings responses, and the chart is ambiguous. I shall attempt a direction-neutral trade.
The grid is not the best to work with. both calls and puts lack strike prices withy probabilities in the 70s of expiring out of the money for maximum profit. Working with the 80s....
short the $70 puts and long the $67.50 puts,
sold for a credit and expiring Sept. 17.
Probability of expiring out-of-the-money
| SEP | Strike | OTM |
|---|---|---|
| Upper | 80 | 84.3% |
| Lower | 70 | 80.2% |
The premium is $0.56, which is 22% of the width of the position’s wings.
The risk/reward ratio is 3.6:1.
The zone of profit in the proposed trade covers a $5 move either way. The biggest immediate move after each of the past four earnings announcements was $5.99, and the average was $2.44 After eliminating the maximum and minimum post-earnings movements, the central tendency is $1.76.
The profit zone is quite large. But such coverage comes at the price of a large risk/reward ratio. I've taken 3.6:1 before, but never happily, especially when a lack of granularity on the grid is the cause.
One possibility is to narrow the profit zone on one side. I choose the upside because the price on the hart does look a bit soft and the analysts are somewhat bearish. With that configuration, I get...
Iron condor, short the $77.50 calls and long the $80 calls,
short the $70 puts and long the $67.50 puts,
sold for a credit and expiring Sept. 17.
Probability of expiring out-of-the-money
| SEP | Strike | OTM |
|---|---|---|
| Upper | 77.5 | 68.1% |
| Lower | 70 | 80.2% |
The premium is $0.92, which is 37% of the width of the position’s wings. The stock at the time of the order was priced at $75.36.
The risk/reward ratio is 1.7:1.
The zone of profit in the proposed trade covers a $3.75 move either way. The post earnings ranges are unchanged: The biggest immediate move after each of the past four earnings announcements was $5.99, and the average was $2.44 After eliminating the maximum and minimum post-earnings movements, the central tendency is $1.76.
The risk/reward ratio is 1.7:1.
The zone of profit in the proposed trade covers a $3.75 move either way. The post earnings ranges are unchanged: The biggest immediate move after each of the past four earnings announcements was $5.99, and the average was $2.44 After eliminating the maximum and minimum post-earnings movements, the central tendency is $1.76.
Decision for My Account
The latter, narrower profit-zone works, and I have entered a position on TGT with the short legs at $77.50 and $70.
-- Tim Bovee, Portland, Oregon, Aug. 16, 2016
References
Tradecraft: Playing the odds to build winning stock market trades from options, a description of how I trade, can be read here.
Elliott wave analysis tracks patterns in price movements. StockCharts has a good explainer. The principal practioner of Elliott wave analysis is Robert Prechter at Elliott Wave International. His book, Elliott Wave Principle, is a must-read for people interested in this form of analysis, as is his most recent publication, Visual Guide to Elliott Wave Trading.
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Disclaimer
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.License
All content on Tim Bovee, Private Trader by Timothy K. Bovee is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.
Based on a work at www.timbovee.com.
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