Update – Target (TGT) Call Calendar Adjustment

by Dan May 16, 2018 10:54 am • Trade Updates

Back in mid-March, we laid out the bullish case for shares of Target (TGT) following their Q1 earnings results and forward guidance:

At the time when the stock was $71.25 we detailed a call diagonal calendar, selling a shorter dated out of the money call to help finance the purchase of a near the money longer dated call… here was the trade idea:

Shares of TGT are trading $75.30, the short leg of this trade idea expired a few weeks ago and it is now worth discussing how to manage the trade with the long July 72.50 call sufficiently in the money, worth about $4.95 for a decent profit from the trades original $3 outlay.

Let’s consider our options:

  1. take the profit by selling to close the July 72.50 call
  2. sell a higher strike call in July making a vertical call spread. For instance, could sell the July 80 call at 1.40, reducing the premium at risk to 1.60 leaving you long the July 72.50 / 80 call spread for just 1.60 which could be worth 7.50 if the stock was 80 or higher on July expiration.
  3. roll the profit into another defined risk trade idea.

 

Consider the fact that the company will report their Q2 results next Wednesday after the close I think it makes sense to go with #3.

Action: TGT ($75.30) Sell to Close July 72.50 call at 4.95 for a 1.95 profit
New Trade Idea: TGT ($75.30) Buy to open July 75 / 85 call spread for $3 (or a debit of $1.05 on the roll)

-Buy to open 1 July 75 call for 3.50

-Sell to open 1 July 85 call at 50 cents

Break-even on New Trade Idea including roll:

Profits of up to 8.95 between 76.05 and 85 with max profit of 8.95 above 85

Losses of up to 1.05 between 75 and 76.05

Rationale: The roll adds a minimal amount of premium while allowing for significant gains between now and July expiration targeting the prior all-time highs near $85 while also including an earnings catalyst. The profit of the first trade allows for the roll, in this case, to have a very near the money participation with a very attractive risk-reward potential.

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