The Level to Watch Ahead of Target Earnings

TGT shares recently ran into trouble near a key technical level

by Patrick Martin

Published on Nov 13, 2017 at 1:19 PM

Retail stocks have been in focus lately, with J C Penney (JCP) and Sears (SHLD) among the retailers that reported earnings last week. Stepping up to the plate this week is Target Corporation (NYSE:TGT), the shares of which are staring up at a notable technical level ahead of earnings before the open on Wednesday. Here's a closer look at TGT stock's performance lately, and how options traders are playing the retail name ahead of earnings and Black Friday.

It's been a choppy year for Target stock, shedding 16% in 2017. At last check, the equity was down 2% to trade at $60.17, despite receiving two price-target hikes today, including to $62 from $60 at J.P. Morgan Securities. The overhead $63 area represents a 38.2% Fibonacci retracement of TGT's 2015 high to its 2017 low, and already kept a tight lid on TGT stock's rally attempts in October. Plus, $63 acted as support for Target shares in early 2017, before a massive post-earnings bear gap in late February.

Fib Levels TGT

The retail name has a mixed history of post-earnings price action. Target shares have closed higher in the session subsequent to the company's earnings report in four of the past eight quarters -- averaging a move of 5.7%, regardless of direction. This time around, the options market is pricing in a one-day post-earnings swing of 9%, based on the stock's at-the-money (ATM) implied volatility (IV) data.

Short sellers will be eyeing Wednesday's report with great interest. Short interest increased by 3.5% during the last two reporting periods, to a record high 57.72 million shares. This represents a healthy 11% of TGT's total available float. At the stock's average pace of trading, it would take about two weeks to buy back these bearish bets.

In the options pits, traders have preferred Target calls over puts lately. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), TGT sports a 10-day call/put volume ratio of 2.58, which ranks 19 percentage points from a 52-week high. The out-of-the-money November 65 call has seen the biggest open interest increase in the past two weeks, with a healthy portion of the action of the buy-to-open variety. It's possible that Target shorts bought to open the calls to hedge their bets in the event of a post-earnings pop.

Whatever the motive, the good news for "vanilla" options buyers is that Target's Schaeffer's Volatility Scorecard (SVS) is perched at a lofty 92. In other words, the equity has made outsized moves over the past year, relative to what the options market has expected.

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