Big call roll detected in retailer: Options recap

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Someone’s apparently using options to ride the bounce in a big-box retailer.

Here’s a breakdown of heavy options activity detected in Target (TGT) this morning:

  • A block of 12,000 January 72.50 calls was bought for $7.55.
  • An equal number of July 70 calls was sold for $6.65. (These expire on Friday.)
  • Volume was below previous open interest in the 70s expiring which indicates an existing position was closed and rolled forward in time.
  • Making the adjustment cost a net $0.90 per share.

That translates into a net cost of $0.90. The total cost was about $1 million because every contract controls 100 shares.

Calls fix the price where a security can be purchased, so they can make money when a stock rallies. In the case of today’s trade, it looks like the investor previously bought the July 70 calls when TGT was lower and was sitting on profits. Rolling to January provides an additional six months of upside exposure and prevents them from getting assigned shares on Friday.

It’s also noteworthy that the trader is using in-the-money contracts as a stock-replacement technique. That makes it possible to ride a rally with much less capital owning shares. But it also creates the risk of losing their entire principal from even a modest drop. (See our Knowledge Center for more.)

TGT fell 0.85 percent to $77.06 in afternoon trading, and is up 18 percent so far this year. The retailer’s clawed back from a big selloff in 2017 as management looked to adapt to a radically new world of consumer behavior. Its strategy includes remodeling/shrinking stores, introducing new brands and digital investments.

The next earnings report is due on August 22.

Overall option volume in TGT is about twice the monthly average today, with calls outnumbering puts by a bullish 10-to-1 ratio.

Target (TGT) year-to-date chart, with 50-day moving average.
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David Russell is VP of Market Intelligence at TradeStation Group. Drawing on nearly two decades of experience as a financial journalist and analyst, his background includes equities, emerging markets, fixed-income and derivatives. He previously worked at Bloomberg News, CNBC and E*TRADE Financial. Russell systematically reviews countless global financial headlines and indicators in search of broad tradable trends that present opportunities repeatedly over time. Customers can expect him to keep them appraised of sector leadership, relative strength and the big stories – especially those overlooked by other commentators. He’s also a big fan of generating leverage with options to limit capital at risk.