On May 19th we checked in on beaten up retail stock Target and looked for an inexpensive way to go contrarian and play for a bounce in the second half of the year. Here was the trade at the time (May 19th) and some thoughts:
If you agree that TGT’s poor sentiment, low expectations, poor stock performance, cheap valuation and the potential for acquisitions that would accelerate e-commerce growth meaningfully could turn the stock around in late 2017, a defined risk strategy that positions for a Q3 rally make sense:
So what’s the trade? A Call Calendar…
TGT ($56) Buy July / Oct 60 Call Calendar for $1
-Sell 1 July 60 call at 55 cents
-Buy 1 Oct 60 call for 1.55
Target stock went lower after this trade and even tested the $50 level, which wasn’t great for the trade but it validated only risking $1 on a calendar rather than buying stock or taking on something with more deltas. But it’s a loser nonetheless.
Today the stock has bounced back a bit on the heels of the company upping its second quarter sales forecast. However, the stock is still lower than our initial entry on the trade. With the stock 53.15 the initial trade is worth about .55 vs the initial 1.00 risked. Furthermore, the strike at $60 seems pretty far away at the moment, even all the way out to October and the July 60 calls are worthless so the trade is essentially an October out of the money call at this point. Therefore taking the loss and moving on may make sense. But for those that want to stock around and still agree with the original thesis a roll to a lower strike makes sense. Moving down 2.5 in October, and re-establishing the calendar part with a call sale in August keeps the trade alive:
TGT (53.10) Sell to close the July/Oct 60 call calendar at .55 (for a .45 loss)
Buy to open the Aug/Oct 57.5 call calendar for .60 (1.05 net)
- Sell to open the Aug 57.5 call at .40
- Buy to open the Oct 57.5 call for 1.00
Rationale – This only adds .05 in risk to the original trade but has a much better chance of success to get back to even or make money. The ideal situation is for the stock to be 57.5 on August expiration, at which point the October calls could be turned into a vertical. If the stock goes lower from here the roll has only added another 5c in net risk but of course the entire trade can still be worthless, so this is only for those not wanting to take the .45 loss now.