Since mid-July, Target has traded in a range between 145 and 185. With earnings due next week, investors may be wondering where Target stock will trade from here. While no one knows for sure, the options market gives some clues.
Expected Move For Target Stock Earnings
According to the IBD Stock Checkup, TGT stock is ranked No. 4 in its industry group and has a Composite Rating of 39, an EPS Rating of 55 and a Relative Strength Rating of 32. Not the most stellar ratings.
For most of the year, Target stock traded below its 200-day moving average line. Lately, it's been back and forth around its 50-day line. With earnings due next week, can the options market shed some light on what kind of move to expect?
In options trading, there is a concept called the expected move. This represents the option market's expected range for an underlying stock, for a specific time period.
The quickest way to work out the expected move on earnings is to look up the option chain for the nearest expiration date after the earnings report. Simply add together the price of the at-the-money put option and the at-the-money call option. While there are more detailed calculations, this quick guide serves as a reasonably accurate estimate.
Target stock closed yesterday at 159.87 so we can use the 160 strike for the call and put at the Nov. 18 expiration to make our expected move calculation.
Yesterday, the 160 call traded around $7 and the 160 put was around $7.95. Adding these together gives us an expected move of 14.95. It's important to note, this doesn't tell us the direction it might go, just how much of a move is expected.
By adding and subtracting 14.95 from yesterday's close at 159.87, we can estimate an expected range for Target stock between 144.92 and 174.82 at the Nov. 18 expiration.
Ways To Use The Expected Move For Trading
So how can you use this information in your trading?
Some traders will use the expected range to determine their option trades. For example, bearish traders might place a bear call spread above 175. They might sell the 175 call and buy the 180 call.
Yesterday, that spread on Target stock sold for around 80 cents for a return potential of 19.1% ($80 premium/$420 capital at risk).
Bullish traders might go for a bull put spread below 144.92. There you might sell the 140 put and buy the 135 put.
Yesterday, this trade had around a 14.4% return potential ($63 premium/$437 capital at risk).
You might also notice, this column has featured a number of iron condors recently that have worked out well. That is a neutral trade that combines the bull put spread and bear call spread. You get the max profit when the stock stays between your expected range at expiration.
It will be interesting to see where Target stock ends on Nov. 18 and whether it stays within the expected range or not.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ
