From our Morning Report:

Buying habits are changing.  

This is not news to people who've been listening to our Live Trading Webinars for the past few months or followed along in our PSW Reports or our Live Member Chat Room (all of which you can be join right HERE).   In fact, just last Thursday we decided TGT was cheap enough and opened the following trade at 1:40 pm for our Long-Term Portfolio:

• We talked about how silly TGT is at $160 and we sold 5 2024 $200 puts in the LTP for $19.85 ($9,925) and there's nothing wrong with that TARGET (so clever!) so let's add 15 TGT 2024  $150 ($32.50)/200 ($13.50) bull call spreads at $19 ($28,500) and that will put us in overall at net $18,575 on the $75,000 spread.   If TGT goes lower, we sell 50 more calls and add 10 more longs.  

We already had a loss on the puts but we sold 5 2024 $200 puts for $19.95 so our net target on 500 shares is $180.05 and our position looks like this:

TGT Short Put	2024 19-JAN 200.00 PUT [TGT @ $159.67 $-1.37]	-5	4/7/2022	(591)	$-9,925	$19.85	$30.53	$-19.85			$50.38	–	$-15,263	-153.8%	$-25,188
TGT Long Call	2024 19-JAN 150.00 CALL [TGT @ $159.67 $-1.37]	15	6/2/2022	(591)	$48,750	$32.50	$-0.48				$32.03	$-1.26	$-713	-1.5%	$48,038
TGT Short Call	2024 19-JAN 200.00 CALL [TGT @ $159.67 $-1.37]	-15	6/2/2022	(591)	$-20,250	$13.50	$-0.65				$12.85	$-0.93	$975	4.8%	$-19,275

TGT should be down around $145 this morning on the news but taking a writedown on inventory is not really news and TGT expects to return to normal margins (6%) in the second half of the year so, if you are a long-term investor, NOW is the time to be buying, not selling.  When a stock plunges 10%, there are things we can take advantage of and thing one will be selling 10 of the 2024 $150 puts for $25.  That will be a pre-roll of the short $200 puts but, since we don't think $180 is an unreasonable target – we're not going to buy those back until TGT bounces – perhaps next quarter.

The other thing we can take advantage of is the way the $140 or $130 calls that are in the money will lose significantly more price than the out of the money 2024 $150 calls we have – which will gain premium as the volatility of the stock goes up.   We will take advantage of that by rolling our $150 calls (now $32.03) to the $140 calls ($37.50 at yesterday's close) or the $130 calls ($44 at yesterday's close) as long as we can pay less than $5 for $10 worth of position.

Assuming we spend $5 to roll to the $140 calls, that would be $7,500 spent for the roll and $25,000 collected on the puts and we paid $18,575 for the overall position so now our net cash in drops to $1,075 for the $140/200 spread that is $7,500 in the money at the assumed $145.  We are obligated to own 500 shares at $200 ($100,000) and 1,000 shares at $150 ($150,000) so our commitment is owning 1,500 shares of TGT at $166.66.  

As long as TGT stays over $120, then our downside risk is about $45 x 1,500 shares = $67,500 but we would mitigate that by rolling our short puts and selling short calls to cover.  For example, if we are assigned the stock at $166.66 and we sell the 2024 $140 calls for $35, then our net would be $131.66 

This is a process called "scaling in" to a position – we begin with a small commitment and then, if the stock gets even cheaper for what we consider to be poor reasons – we adjust and add to it. In the case of TGT, sales are not off – they simply have the wrong mix of inventory as consumers are scaling back their spending habits and they need to adjust but $145 is $67Bn in market cap for TGT, who made $6.9Bn last year and, even with the adjustments, should make $4Bn this year and $6Bn again next year so $67Bn is stupidly cheap – and we'll take advantage of it!  

This is why we like to have plenty of cash (75% in our LTP) on the sideline in a choppy market – you never know when things are going to go on sale…

After the open, we officially are going with:

TGT/Millard – From scratch, I'd go with:

• Sell 5 2024 $150 puts at $23 ($11,500)
• Buy 15 2024 $130 calls at $38.50 ($57,500)
• Sell 15 2024 $170 calls at $18.25 ($27,375)

That's net $18,625 on the $60,000 spread with $41,375 (222%) upside potential in 18 months if TGT can get back to $170, 

Officially, for the LTP, we're selling 10 more 2024 $150 puts for $23 (opened at $24) and we are rolling the 15 2024 $150 calls (now $28.50) to 15 2024 $140 calls at $33.50 for net $5 ($7,500).  Unfortunately, TGT bounced back very fast – probably because I mentioned it in the main post, so my bad.