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Target Needs an Earnings Bull’s-Eye to Chase Kroger, Walmart Higher

Joseph Hargett

Target Corporation (NYSE:TGT) finds itself in a precarious position this week. Target is slated to step into the earnings confessional this Wednesday, and the bar is set rather high.

Combine this with the fact that TGT stock is on the verge of overbought territory, and it’s enough to make even options traders nervous. Luckily, there are ways to play both sides of the coin.

Let’s get this out of the way; Target earnings not only should be good … they must be. Both Walmart (NYSE:WMT) and Kroger (NYSE:KR) have already knocked the ball out of the park with their respective quarterly reports. The pressure is on for TGT stock to do the same.

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Wall Street is expecting a profit of $1.40 per share from Target, with revenue set to rise 5.4% to $17.31 billion. Earnings targets have been revised higher in the past month, which is a positive development for TGT bulls. What’s more, EarningsWhispers.com puts Target’s whisper number at $1.42 per share.

So far so good. However, TGT stock has already benefited from a broad rally in the consumer goods/grocer sector — bolstered by none other than Kroger and Walmart. In other words, TGT stock is already benefiting from expectations for an earnings beat. All that’s left now is guidance (and for Target not to miss expectations).

That leaves little room on the upside for TGT stock to extend its current rally, unless the company can wow Wall Street this week like Walmart did with online sales growth.

TGT stock

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The technical risks can be seen in a daily chart for TGT. The stock has enjoyed a solid run higher in the past several months, bolstered in August by strong reports from Kroger and Walmart.

TGT shares are now challenging resistance in the $85 region and trading in all-time high territory.

Furthermore, TGT stock’s 14-day relative strength index (RSI) is on the verge of tagging 70 once again. Readings of 70 or above on the 14-day RSI are indicative of overbought conditions and have led to sharp selloffs in TGT stock on every test so far this year.

There’s plenty of potential in Target’s sentiment backdrop. According to Thomson/First Call, 18 of the 26 analysts following TGT stock rate the shares a hold.

Additionally, the 12-month consensus price-target of $79.87 rests well below the stock’s current trading range. In short, there is room for many of these bears to upgrade or increase their targets on TGT stock.

So, how much of a move in the options market pricing in for Target’s stock following earnings? According to weekly Aug. 24 implied volatility, about 6%. That places the upper bound at $88, and the lower at $78.

2 Trades for Target Stock

Put Buy: With TGT stock near overbought levels, and Kroger and Walmart already setting the bar high, a sell-on-the-news event may be in order for Target. This is mostly because it would take a pretty impressive report to push TGT stock further into all-time-high territory, and Target hasn’t managed one of those in years.

Traders looking to capitalize on a post-earnings drop in TGT stock might want to consider buying a Sept $82.50 put. At last check, this put was asked at $2.71, or $271 per contract. Breakeven lies at $79.79, while a double lies at $77.08 — which is just below the lower bound predicted by weekly Aug. 24 implied volatility.

Call Buy: It is entirely possible that Target will impress a few bearish holdouts. After all, TGT stock is trading near all-time highs and the brokerage community has been loath to give the shares any love whatsoever. If Target can put in a quarter like Kroger or Walmart, there may be upside to be had before the profit-taking kicks in.

Traders looking to bet on an extended rally for TGT stock might consider buying a Sept $82.50 call. At last check, this call was asked at $3.42, or $342 per contract. Breakeven lies at $85.92, while a double can be had at $89.34 — a little north of the projected move by weekly Aug. 24 implied volatility.

As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.

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