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Top Trades for Tue, 19 Sep 2017 13:59 – TGT

OK, let's do a proper write-up on TGT for the OOP:

We're liking Target (TGT) because they are low in their channel, just under $60 and trading at a p/e of about 13.5, with no less than $4.30 in earnings expected this year and perhaps moving to $5 next year so that, in itself, makes them a bargain at $59.25.

In addition to the fact that fears of Amazon are overblown, Target is well-positioned to benefit from hurricane damage in Texas and Florida.  Millions of homes suffered damage and will need to go to the store to replace a lot of goods and TGT is a go-to place – especially when people are looking to save a bit of money.

Much more importantly, TGT has their grocery business and Millions of homes were without power for a week (some longer) and that means they have to throw out everything in their refrigerator and then they have to re-stock and that's huge business for the grocery stores.  

Florida has 137 TGT and "just" $69Bn total sales so 2M homes x $300 more than usual spent would be a 1% pop but in 1Q it's a 4% pop. Should be enough to get them back over $60 – especially as they have very low expectations this Q (0.86 vs $1.04 last year) and they beat last Q by 3.4% at $1.23 – so I think the estimates are way low.  

Not only that but ToysRUs is going BK and again, this is a place where TGT can fill a gap as they have extensive toy sections with a lot of the same things you used to find at ToysRUs.  Though the bankrupt ToysRUs can wage a price war, Target will have more pull with vendors to get the current toys kids want – just a cherry on top of the reasons we like them down here.  

In our LTP, we already have a play on TGT which looks like this:

Short Put 2019 18-JAN 57.50 PUT [TGT @ $59.26 $0.17] -10 4/7/2017 (486) $-10,600 $10.60 $-3.88 n/a     $6.73 $-0.03 $3,875 36.6% $-6,725
Long Call 2019 18-JAN 50.00 CALL [TGT @ $59.26 $0.17] 30 6/27/2017 (486) $19,950 $6.65 $4.75     $11.40 $-0.55 $14,250 71.4% $34,200
Short Call 2019 18-JAN 60.00 CALL [TGT @ $59.26 $0.17] -30 6/27/2017 (486) $-9,000 $3.00 $2.70     $5.70 $-0.21 $-8,100 -90.0% $-17,100

We're a little ahead and we aimed low so right on track as well.  

In the OOP, we have an even lower spread that's well in the money:

Long Call 2019 18-JAN 40.00 CALL [TGT @ $59.18 $0.09] 7 6/16/2017 (486) $8,750 $12.50 $8.18 n/a     $20.68 - $5,723 65.4% $14,473
Short Call 2019 18-JAN 52.50 CALL [TGT @ $59.18 $0.09] -7 6/16/2017 (486) $-3,500 $5.00 $4.65     $9.65 - $-3,255 -93.0% $-6,755
Short Put 2019 18-JAN 45.00 PUT [TGT @ $59.18 $0.09] -5 6/19/2017 (486) $-2,125 $4.25 $-1.95     $2.31 $0.00 $973 45.8% $-1,153

I want to get more aggressive and the 2020s are out so let's:

  • Sell our 7 2019 $40 calls for $20.50 ($14,350)
  • Roll the short 7 2019 $52.50 calls at $9.70 ($6,790) to 12 2020 $65 calls at $5.50 ($6,600) 
  • Buy 12 2020 $50 calls for $12.40 ($14,880)
  • Roll the 5 short 2019 $45 puts ($1,150) at $2.30 to 8 2020 $52.50 puts at $7 ($5,600) 

So we are pocketing $3,750, which is more than the $3,125 we started with and now we go from a potential (almost certain) $5,625 profit in 16 months to a potential $18,625 profit (still playing conservative) in 28 months.  I think it's worth waiting 12 more months for 3x more money, don't you? 

As a new trade (if you're not already in it) – it's simply selling the new 2020 $52.50 puts for $7 and buying 50% more of the 2020 $50/65 spreads for $6.90 and that's net $6.70 and returns $30 for a $13.30 profit on each spread (192%) if TGT is over $65 in Jan 2020.


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