Tale of Two Retailers: Long Target and Short Big Lots

Buy Target (NYSE: TGT)

Target: $100

Buy Up To: $80

Earnings date: late February

Options Trades:

Buy to open the March 16, 2018 call on Target (NYSE: TGT) with a strike price of $77.5 at $1.95 or lower. Symbol (TGT180316C77.5)

Buy to open the April 20, 2018 put on Big Lots (NYSE: BIG) with a strike price of $57.5 at $3.50 or lower. Symbol (BIG180420P57.5)

The Rationale:

Target’s recent refresh of its apparel and home furnishing inventory is paying off in spades. As investors recognize Target’s ability to grow earnings double-digits after a one year retrenchment period, the stock should move higher.

  1. The company already announced a super strong 3.4% comp sales number for the critical holiday quarter. Comp sales in EVERY core merchandise category improved and accelerated.
  2. Earnings for the quarter are due the last week of February (no formal date set yet). Management has given conservative guidance for sales and importantly for profit margins, giving itself some wiggle room if prices for food and health and beauty products remain under pressure.
  3. The company’s recent purchase of same-day delivery service Shipt provides it with robust logistics technology for efficient home delivery.
  4. My $100 target is based on a 19 P/E (price to earnings) multiple on January 2019 earnings of $5.25.

Big Lots is getting crunched by competition and inventory issues in its two most important categories:

  1. Furniture, which now makes up almost one quarter of sales, has been driven by mattress sales. Target’s introduction of popular, low priced Casper mattresses should crunch Big Lots’ furniture growth, which has already been wilting.
  2. Furniture grew just 1% last quarter, down from mid-single digits and is up against a tough 5% gain last year.
  3. Consumables and Food, which account for 35% of sales are declining. Price pressure from grocery stores and less availability of closeouts from manufacturers who have learned to produce just enough inventory are hurting this category.
  4. Big Lots reports its fourth-quarter earnings in the first week of March. These puts should capture the downside I expect from that event.

Stock Talk

Victor

Victor

BIG Filled @ 3.20 ND

Victor

Victor

Target filled @ 1.95 ND

Paul

Paul

Filled BIG at $3.40.

Filled TGT at $1.95 on Fidelity.

DR083157

DR083157

Do you and Jim Fink coordinate these. He has us long Big

Linda McDonough

Linda McDonough

Hello,
No, we do not coordinate trades. I just looked at Jim’s BIG options trade, which is neutral to bullish. His trades are based a bit more on historical seasonality and options pricing versus my focus which is purely fundamental. As they say, it takes both sides to make a market!
Best,
Linda

Jeffrey Shultz

Jeffrey Shultz

I’m picking your side on this one, Linda. 😉

Stanley

Stanley

TGT filled for 2.00 @ Fidelity

Mark F

Mark F

TGT filled @ 1.92 Fidelity

Rick

Rick

I abandoned one of my normal rules – buying at an ITM strike – and bought the Mar $77.50 Calls at $1.87. Looking forward to the Feb earnings announcement.

Tom B

Tom B

I executed two spreads with very nice credits:
TGT: Bot April 70 puts, Sold 75 puts for a $1.874 credit
BIG: Bot April 62.5 Calls Sold 57.5 Calls for a $1.96 credit
Thanks for the ideas Linda!

Stanley

Stanley

BIG filled for 3.60 @ Fidelity

Abhi A

Abhiruchi Agarwal

I am a newbie. If I execeute the BIG options as you have written, I get a warning that “The limit price you entered on your buy order is ABOVE the ask price for this security.” the max bid is 3.40. Am I too late to execute the option as is? or should i lower the limit to 3.40?

Victor

Victor

Look for mid point and use that value to place your bid. Make sure the amount of debit is what you are comfortable with. Best of luck

Abhi A

Abhiruchi Agarwal

Thanks. What time in force do you use? Day, Good till canceled?

Linda McDonough

Linda McDonough

Thank you, Victor, for pinch-hitting while I was in a meeting.

My price limits are the highest price that I suggest paying. Always place your bid between the bid and ask (right in the middle is a good starting point). Many of these options have huge spreads so you can get a fair price.

This goes for selling the options when we close them out as well. You never know what news might hit overnight so personally, I like a trade that expires at the close and then if it isn’t filled, I re-enter it the next morning.

Best,
Linda

Michael D

Michael D

hello!
I have been an OFI member since last fall and having so much fun I just subscribed to every service!
joined you in both trades as directed this morning Linda, thank you.
do you provide exit guidance in the form of Alerts when needed as well on your trades?
looking forward to this service as well.
thanks again for helping us learn and attempt to be successful. I truly enjoy the fellow trader commentary and advice as well.

Linda McDonough

Linda McDonough

Michael,
Welcome aboard- thank you for subscribing.
Yes, I will send a trade alert when selling any of the options or stocks. I also will keep you updated on any news that moves the stocks. This is usually in the weekly update I send out each Monday but if it is significant, I will post the update mid-week on the Stock Talk board as well.
Best,
Linda

George McMillion

George McMillion

TGT Call filled at $1.95 yesterday
BIG Put filled at $3.30 today

Both on TDA. Thank you Linda.

MODERATOR: Lisa G

MODERATOR: Lisa G

TGT filled at 1.95 today (Friday) as I was not able to get to these until today. BIG order put in but it is trading well above at this point.

Cyan

Cyan

As TGT announced its earnings today and the stock went down, should we hold this position further ?
Please advice.

Cyan

Cyan

Hi Linda,

As TGT announced its earnings today and the stock went down, should we hold this position further ?
Please advice.

Thank you.

Linda McDonough

Linda McDonough

Cyan,
I suggest holding on to them. Target’s results were terrific with the exception of slightly higher expenses for its e-commerce operations. The options expire next week so if I do think we should sell them I’ll issue an alert soon.
Best,
Linda

David Adams

David Adams

Good luck on BIG @ 5.35

Linda McDonough

Linda McDonough

David,
As you know, the market is pretty manic these days so timing these options trades is trickier than ever. Many subscribers have success placing the trade good for a day with a price limit. The spreads in options are wide so I always suggest a $.05-.15 buffer depending on the price of the option. I only issue a close price suggestion once the option has actually traded at that price.
Best,
Linda

JL

JL

Linda, any exit strategy on TGT? Thank you.

Linda McDonough

Linda McDonough

JL-
Unfortunately, the TGT calls will expire worthless today. This is always a risk, but one that I really do endeavor to limit. The March calls for my stocks have been especially painful as the companies delivered the news I was looking for but the stocks dropped.
Once we get within 2 weeks of expiration the options lose their time value rapidly.
Best,
Linda

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