Trading Experiment with Jason at Channel Checkers
Channel Checkers’ research indicated that Target is going to have a good quarter, while Game Stop is not. Is there a way to devise option strategies to benefit from this research? Here’s Channel Checkers research with option suggestions by Phil. Let’s see how it works.
May 20th Update: Target trade would have been successful, we’ll evaluate the GameStop trade tomorrow after their earnings.
Target
Business Strong in 1H for Target. Positive outlook.
Ticker: TGT
Questions We Asked:
1.Do you think the weak housing market and weak economy are hurting business at your location?
2.What is the top selling brand of women’s clothing right now?
3.How is business at you store currently?
4.Do you have excess inventory of any particular product or brand of product that will go on sale or discount soon?
- 53% of respondents stated that the weak housing market or the weak economy overall was hurting business at their store location. 47% said these macro factors were not affecting sales at their store location.
- Mossimo was the top selling women’s brand according to 37% of respondents. 30% said it was Merona and 7% said Isaac Misrahi was the top women’s brand.
- Another surprise in this survey was that 50% of respondents reported business as “above average” at their store location while another 27% said business was “very strong”. 20% reported business “Average” and 7% reported business as “Below Average”.
- 44% of respondents did confirm there was excess inventory of some items like digital cameras and women’s tops while 66% said there was not any excess inventory at their store location.
Conclusion of Channel Check: Retail appears to be making a come back in 1H 2009 thus far. Perceptions of business levels by store representatives is solidly positive. Inventories are not “lean” but are not excessive either. We suspect Target may show solid top line results without a large impact from discounting tied to excess inventories.
Catalyst for stock movement:
TGT Reports Earnings on 5/20/09 Before the Market Open
Example: TGT — Let’s say we did this trade and see how it comes out tomorrow morning: "Jan $41 calls are $5.40 and should make over 20% if TGT has good earnings and breaks over $44. As they are calls, the risk is no more than $5.40 no matter how badly they miss but is more likely to be contained by the 200 DMA at $38, which are likely to drop the calls by roughly 20%. A stop can be set on these calls at $4.50, risking $1, against an unlimited upside gain if things go well." Tomorrow, we’ll see how the TGT calls would have worked out.
GameStop
Gamestop Could be Hurt by Lack of “Hot” Game Titles in 1Q. Negative outlook.
Ticker: GME
Questions We Asked:
1. What is the best selling video game right now?
2. What is the best selling console?
3. What will be the next big game released over the next three months?
- THQ was seen as the best selling game over the past week by 22% of respondents. 19% viewed Resident Evil 5 as the top selling game. No other single game title was seen as the best seller by more than 10% of respondents.
- Surprisingly the Microsoft Xbox 360 was seen as the top console by 44% of respondents, 25% saw the Nintendo Wii as the top console and another 25% saw the Playstation 3 as the top selling console. The market for consoles appears to have tightened considerably since 2007 and 2008 where the Nintendo Wii dominated the response to this question.
- 13% of respondents viewed Bionic Commando as the next big game title coming out, while 12% saw X-men Wolverine as the next big game. These diffuse response rates suggest that there is no major new title coming out in the next month.
Conclusion of Channel Check: The game market looks to be lacking a major “hot” title or platform at the moment. Outside of the Nintendo DS there is also not much exciting consumers in the hardware space for video games. We view this as somewhat problematic as the market may be somewhat slow with little flow in any trend direction. The lack of a “hot” trend we believe could hurt store foot traffic for GME and cause some disappointment.
Catalyst for stock movement:
GME Reports Earnings on 5/21/09 Before The Market Opens.
Example: GME – Already priced for disappointment, GME has an interesting play in which we buy the July $28 puts for $3.30 and sell the July $26 puts for $2.15. This puts you in a $2 bear call spread for $1.15 and anything below $26.85 is a profit up to a maximum profit of .85 (73%). GME would have to go up 7.5% to wipe out all value on the $28 puts and the time value would still be there so it is unlikely that this spread falls below .50, making it a good risk/reward ratio.
We’ll readjust the GME option prices tomorrow.
Update (May 20):
Target: Target posts 13 percent drop in 1st-quarter profit, AP. "Discount retailer Target Corp. reported a 13 percent decline in first-quarter profit on Wednesday as it confronts sluggish consumer spending. But the results beat analysts’ estimates because of cost-control measures." Target is trading up around 4%-5%. Yahoo quote: 44.09 
2.15 (5.13%). The Jan. 41 calls are trading around $7 as of 10 am (est).
GameStop: Earnings will be released tomorrow am. July $28 puts are currently (10:05 am) between $3 (bid) and $3.20 (ask), and the July $26 puts are trading between $1.95 and $2.05. If we buy the July $28 puts for $3.20 and sell the July $26 puts for $1.95, we’d be in this bear spread for $1.25.
Update (May 21)
GameStop: GME is down -$4.57 (10:40 am est). How’s our bearish spread doing? The July $28 puts – bought – have a bid at $6.20 and an ask at $6.40. The July $26 puts – sold – have a bid at $4.50 and an ask at $4.70.
Bought July $28 puts at $3.20 and can sell them at $6.20, resulting in a profit of $3.00. Sold July $26 puts at $1.95 can now be bought back for $4.70, resulting in a loss of -$2.75. So a gain of $3.00 and a loss of $2.75, results in a gain of $.25. This calculation assumes the buying on the bid and selling on the ask, so the actual results could be slightly better.
