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Target (TGT) is currently showing above average volatility with an IV Percentile of 85% and an IV Rank of 71%.
TGT rates as a Strong Buy according to 16 analysts with 3 Moderate Buy, 11 Hold and 1 Strong Sell rating.
Target Corp. has evolved from just being a pure brick-&-mortar retailer to an omni-channel entity.
It has been modernizing supply chain to compete with pure e-commerce players.
Its acquisition of Shipt to provide same-day delivery of groceries, essentials, home, electronics as well as other products.
Target provides an array of owned & premium branded goods ranging from household essentials and electronics to toys and apparel for men, women and kids.
It also houses food and pet supplies, home furnishings and d'cor, home improvement, automotive products and seasonal merchandise. It also offers in-store amenities, consisting of Target Caf', Target Photo, Target Optical, Portrait Studio, Starbucks and other food service offerings.
A greater number of general merchandise stores provides an edited food assortment, including perishables, dry grocery, dairy & frozen items. Its digital channels include a wide merchandise assortment, including many items found in stores, along with a complementary assortment.
Today, we’re going to look at a short strangle trade due to the high IV percentile.
A short strangle aims to profit from a drop in implied volatility, with the stock staying within an expected range.
When implied volatility is high, the wider the expected range becomes.
The maximum profit for a short strangle is limited to the premium received while the maximum potential loss is unlimited. For this reason, the strategy is not suitable for beginners.
TGT SHORT STRANGLE
Traders that think TGT stock might remain stable over the next few weeks could look at a short strangle.
As a reminder, a short strangle is a combination of an out-of-the-money short put and an out-of-the-money short call.
The idea with the trade is to profit from time decay while expecting that the stock will not move too much in either direction.
For TGT stock, an August 16 put with a strike price of $140 could be sold for around $1.50.
Then the short call, placed at the $155 strike, could be sold for around $1.20.
In total, the short strangle will generate around $2.70 per contract or $270 of premium.
The profit zone ranges between $138.80 and $156.20. This can be calculated by taking the short strikes and adding or subtracting the premium received.
If price action stabilizes, then short strangles will work well. However, if TGT stock makes a bigger than expected move, the trade will suffer losses.
Conclusion And Risk Management
One way to set a stop loss for a short strangle is based on the premium received. In this case, we received $270, so we could set a stop loss equal to the premium received, or a loss of around $270.
Another way to manage the trade is to set a point on the chart where the trade will be adjusted or closed. That could be around $140 on the downside and $155 on the upside.
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.
On the date of publication, Gavin McMaster did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
