Unusual Options Activity: Target (TGT)

Target (TGT)

Traders bet on recovery from yesterday’s drop.

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  • Yesterday, shares of retailer Target (TGT) slid about 7 percent as the company announced poor holiday sales.

    But at least one trader sees the drop as temporary. That trader started to buy the January 31st $120 calls, expiring in just 15 days, creating a seven-fold rise in volume on the options.

    Paying about $1.05 per contract, that trader will need to see shares recover to just over $121 from around $117, or move higher by about 3.4 percent, to profit.

    Even after yesterday’s drop, shares of the retailer are still up about 83 percent in the past year, far outpacing the general market. And prior attempts to short the high-flying company haven’t worked out so well.

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  • Action to take: We see shares as somewhat fairly valued here, perhaps just a tad on the inexpensive side at less than 17 times forward earnings. And it’s true that companies tend to recover at least part of a big, news-driven drop quickly.

    Speculators may like to follow this option trade. For a trade with a wider window, consider the March $120 calls as well.

    Investors looking to buy shares now can get a 2.1 percent dividend, a far lower yield than what investors have been able to get in the past few years. A bigger pullback in shares, to $110 or lower, looks like a better price for getting into shares for the long haul.