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Option Idea of the Week: Target Corporation (TGT)

Outperforming TGT could be ready for some contrarian tailwinds

by 7/19/2013 10:11 AM
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Broadline retailer Target Corporation (NYSE:TGT) has shown some technical fortitude in 2013, gaining almost 23% year-to-date, and outpacing the broader S&P 500 Index (SPX) by close to 5 percentage points during the same time frame. In fact, the security recently broke above its mid-2007 highs and managed to touch a new record peak of $73 on July 18. What's more, the $68 area has emerged as a level of support, and has contained a few pullbacks since mid-March. This tenacity on the charts -- combined with some heavy pessimism on the Street -- could put TGT in a prime position for further gains over the next few months.

Daily Chart of TGT since January 2013

Dissecting the equity's sentiment backdrop, traders have been overwhelmingly bearish toward TGT in the options pits lately. In fact, the stock's 10-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) put/call volume ratio stands at a whopping 20.62, confirming speculators have bought to open roughly 21 puts for every call during the past two weeks. Not surprisingly, this ratio ranks higher than 98% of all other readings taken within the last 12 months, signaling options players have been snapping up puts over calls at a near annual-high pace.

In a similar vein, the Schaeffer's put/call open interest ratio (SOIR) for TGT is docked at 2.71, with puts almost tripling calls among options with a shelf-life of three months or less. This ratio stands just 5 percentage points shy of a 52-week acme, conveying short-term speculators have rarely been more put-focused toward the equity over the course of the past year. An unwinding of these bearish bets -- particularly at the underfoot August 70 strike, which holds open interest of nearly 5,400 contracts -- could end up boosting the shares higher.

Meanwhile, short interest on the popular retailer spiked by about 35.4% during the past two reporting periods, bringing the number of shares sold short to nearly 20 million. This is the equivalent of more than four sessions' worth of pent-up buying pressure, at the security's average daily trading volume. In other words, the stock could end up reaping the benefits of a short-covering rally, should TGT continue to motor up the charts.

This skepticism is present among the brokerage bunch, as well. Although 10 out of 19 analysts have handed out "strong buy" endorsements, the remaining nine maintain a tepid "hold" rating for TGT. Furthermore, the equity's average 12-month price target of $73.45 represents a premium of just 1.1% from its current price of $72.66. This leaves some wiggle room for a wave of upgrades and/or price-target hikes, which could help propel the stock even higher.

Traders looking to bet on extended upside for Target Corporation may wish to consider buying the security's in-the-money October 67.50-strike calls, which sport an ask price of $5.80. Please be aware that the company is on deck to report second-quarter earnings before the market opens on Aug. 21.


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