I remember a time when Target Corporation (NYSE:TGT) was where the smart money went to invest in retail. But just like most of retail, TGT stock is now miles below its peak. Blame for this carnage in brick-and-mortar stocks falls squarely on Amazon.com, Inc. (NASDAQ:AMZN).
Consensus is that these woes are the direct cause of the evil that AMZN did, but I disagree. I place the blame on retail management teams who failed to react early enough to the obvious threat from the online sales phenomena.
Now Target and others are scrambling to survive.
While I don’t enjoy seeing investors take losses on Wall Street, I feel that traditional retail management caused their own pain. So you’d think that I am here to share a bearish trade on TGT stock, but I am not.
I see some hope for the price action in Target stock, so I want to profit from it. Don’t confuse this with me having a bullish opinion on retail as a sector. This is a pure bet on the price patterns in Target for the next few months.
Fundamentally, TGT stock is cheap relative to its industry and in general terms. With a price-to-earnings ratio under 12 and 2.8 price-to-book ratio, it is not likely to be a major mistake to own shares at a discount from current price. This point is key to my trade. In addition, it pays a handsome dividend that lends support to the stock in tough times.
I am not one to follow consensus, but I do rely on it to structure my trades. Experts who cover Target stock are all underestimating it. Most have it rated as a HOLD or SELL. Furthermore, the stock is now trading below its average price target and closer to the bottom end of the range than the top. So there is upside potential they just don’t want to back the idea up with their ratings.
This increases the odds of upside surprise headlines rather than downgrades. I mention this not because I need the headline to profit but to note the lowered threat of the negative headline complication for this trade.
Technically, TGT stock showed upside promise in September. But even after a 10% rally, it failed to completely fill the measured move that was available then. It has since given back about half of the rally.
The good news is that the price action looks like it has developed a support level at $54 per share. In today’s trade, this is important because I want to bet that recent support will hold so I can create my income.
Bottom Line on TGT Stock
The idea is simple. I want to sell risk against those levels and if they do hold, then I earn my profits. Key is that I am willing to own Target stock, but at a discount from today’s prices. With a healthy buffer zone, I am confident that I can manage my risk of ownership to a profit if the price goes against my trade.
The trade: Sell TGT Jan $50 put and collect 85 cents to open. This is a bullish trade that has an 80% theoretical chance of success. But if the price falls below my strike, then I accrue losses below $49.15.
Those who want to mitigate the risk of selling naked puts can sell a spread instead.
The alternate trade: Sell TGT Jan $50/$45 credit put spread, where I can yield 10%, but with much less money at risk.
In either case, I don’t need a rally to win. Target stock can meander or fall up to 12% and I still would retain maximum gains.
No matter what, it’s important to remember that investing in the stock market can be dangerous, so I never risk more than I can afford to lose.
Learn how to generate income from options here. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on twitter and stocktwits.
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