Billionaire investor Warren Buffett unloaded all of his Target Corp. (NYSE: TGT) shares at the end of 2006 when the stock was trading in the upper 50's, indicating that the investing guru does not see significant growth potential in this stock looking forward. He also got rid of Ameriprise (NYSE: AMP), H&R Block (NYSE: HRB), and Pier One Imports (NYSE: PIR), which indicates he may have forseen our current market jitters. If you think that his actions mean that Target won't go too much higher in the near future, then it might be a good time to consider a bear-call credit spread on TGT.After hitting a one-year high of $70.75 in July, the stock has fallen back down near previous trading levels over the past few weeks. This morning, TGT opened at $64.73 on good consumer spending numbers. So far today the stock has hit a low of $64.40 and a high of $66.15. As of 11:15, TGT is trading at $64.87, up $1.04 (1.6%). The chart for TGT looks bearish and steady, while S&P gives the stock a neutral 3 STARS (out of 5) hold rating.
For a bearish hedged play on this stock, I would consider an October bear-call credit spread above the $75 range. A bear-call credit spread is an options position that combines the purchase and sale of call options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make a 5.3% return in seven weeks as long as TGT is below $75 at October expiration. Marvell would have to rise by more than 26% before we would start to lose money. Learn more about this type of trade here.
TGT has never been above $75 (or $71 for that matter) and has shown some resistance around $66 recently. This trade could be risky if the retail sector gets a boost from back-to-school, but even if that happens, this position could be protected by strong resistance shown around $70 where the stock topped out back in July. Plus TGT isn't set to report earnings until after October expiration on November 20th.
Brent Archer is an options analyst and writer at Investors Observer.
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Reader Comments (Page 1 of 1)
8-31-2007 @ 1:58PM
mark said...
An interesting strategy. TGT did hit $66 today (8-31). I agree that $75 would be a stretch by the end of Oct. Oct. is generally a poor month for the broad market. We shall see. I like your thinking though.
8-31-2007 @ 2:16PM
Henry said...
Whatever...
The simple fact is that people like to shop at Target; they feel good about the store and that includes men, women and children in many groups. Consumers who wouldn't be caught dead in a WM store love shopping at Target; why, because it doesn't feel cheap. My 11-year old doesn't even say lets go to the store; she says lets' go to Target, i.e., Target is to store as Xerox was to all copy machines. I'm thinking there is a real upside to this perception among the middle class, what's left of it anyway.
9-04-2007 @ 1:15PM
Jim Hamblin said...
Nobody's made much money betting against TGT. Even though there's a lot of "noise", the retail mavens tend to believe that this is a best in class retailer. Short WMT? For sure! They're strategically flawed and their management is not particularly enlightened.