Target Gains (TGT): Looking for a potential options trade

OWelcome to the ORATS Earnings Report, where we search for companies with upcoming earnings announcements, view historical earnings information, and find a potential options trade.

Read on or watch the presentation video here: https://youtu.be/z_qD0gkrV10.

Let’s start by running an analysis of stocks reporting profits this week, which includes the total options volume indicator, sorted from largest to least.

Focusing on Target, as we click through, we see this large-cap discount store company reporting earnings on Wednesday, August 17, ahead of the opening.

The Earnings and Financials tab takes us to more details showing the options market expecting a 7.6% move in either direction. This decision has been violated in 5 of the last 12 wins.

Meanwhile, the post-earnings move was outside the implied range 6 times. In these cases, long overlaps were profitable. The rest of the profit moves likely generated profitable short overlaps. We can overlay quarterly financial data by clicking on the ratios below the earnings chart. Let’s look at the PE ratio, which is the share price divided by trailing twelve month earnings per share.

For TGT, the current PE ratio is 14.9, or 17.8% below the average of the last twelve earnings observations. By returning to the Overview tab, we can quickly run an analysis to find the best options trades. Since profits are fast approaching, we look for neutral strategies and then filter the results of the analysis by S%, or smoothed edge, setting it between negative 3% and 3%.

This allows the results to be restricted to transactions that are priced fairly. The top-ranked trade is a Long Put Calendar with strikes at 180, expiring Friday, September 30 and Friday, September 9, for a debit of $1.33.

By pulling up the trade, we can see the theoretical values ​​in more detail. The distribution advantage, found by the expected value of the earnings picture over the historical distribution of the stock, has a 69.2% advantage. The expected advantage, which is derived from historical volatility, has an advantage of 40.6%. Finally, the smoothed edge, which is calculated by drawing a curve of best fit through the monthly implied volatilities, has an edge of 0.8%. The advantage is relative to the average market price of the trade. Larger positive edges are a theoretical advantage for the trader. We can also look at the earnings chart. The risk reward divides the maximum gain by the maximum loss. Here, the 4.1 to 1 is the ratio of the maximum win of $550 to the maximum loss of -$133. There are two breakeven points for this Long Put Calendar at 167.28 and 194.75. Greek total and ThinkOrSwim code complete information on trade analysis popup.

Next, let’s look at this trade in the trade builder. Over the past month, the stock price has increased by 20.0%, while the thirty-day implied volatility has increased by 6.2%. The average slope of the trend lines is negative. The heat map on the right side of the chart is green where volatility and slope are undervalued, and red where they are overvalued. In this case, the short-term IV and slope are neutral, while the long-term is slightly overvalued.

We can also see this trade overlaid on the monthly implied volatility chart in the channel tab. The legs of this craft are circled.

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Disclaimer:

The opinions and ideas presented herein are for informational and educational purposes only and should not be construed as representing trading or investment advice tailored to your investment objectives. You should not rely solely on the contents herein and we strongly encourage you to discuss any transaction or investment with your broker or investment adviser, prior to execution. None of the information contained herein constitutes a recommendation that any particular security, portfolio, transaction or investment strategy is suitable for any particular person. Trading and investing in options involves risk and is not suitable for all investors.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.