With the stock market losing key levels on Friday, it could be a good time to look for bearish option opportunities. Target has really struggled in recent months with the stock failing to get back above key moving averages. So, this column highlights a bear put spread strategy in TGT stock.
TGT stock has collapsed as much as 27% in the last six months. The Relative Strength Rating has sunk from 58 six months ago to 19 (with 99 being best), according to MarketSmith.
In a bear put spread, this debit spread means that we need to pay the premium in order to open the trade.
On TGT stock, a trader could set up a bear put spread using the 110 strike price as the long put and the 105 strike as the short put for the Jan. 19 expiration.
This trade would cost around $100 per contract, based on recent trading. The maximum potential gain stands at $400.
TGT Stock: Profit From Another Slide
To achieve the maximum profit, this trade would need TGT stock to drop 12% between now and expiration on Jan. 19, 2024.
The break-even point for the bear put spread: 109, which is calculated as 110 less the $1 option premium per contract.
If TGT stock drops early in the trade, it may be possible to make a profit at slightly higher prices.
At expiration, if TGT stock is trading above 110, the entire spread would expire worthless. So, the trade would lose 100% or $100.
For a trade like this, I wouldn't bother with a stop loss. Either the trade works or it doesn't, so I would trade an appropriate position size in case I suffered the full 100% loss. Alternatively, you could set a stop loss at 50% of the premium paid.
As this is a bearish position, traders who think TGT stock could move higher from here should not enter this trade.
Free Access MarketSmith Week: See The RS Rating In New Light
Weakening Ratings
According to IBD Stock Checkup, TGT stock is ranked No. 4 in its group and has a Composite Rating of 48, an EPS Rating of 87 and a Relative Strength Rating of 19.
Please remember that options are risky. 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
