Monday, April 11, 2011

Trade of the Day: Target May $49/$47 ratio put spread 2,500x5,000

The Trade
A trader sold 5,000 May $47 puts at $0.74 and bought 2,500 May $49 puts at $1.48 at no cost to the trader.

As you can see from the graph above, the spread has unlimited risk to zero and a limited max profit. The trader is slightly bearish and would like to see the underlying stock at $47 by expiration. The max profit potential is $500,000. The spread is profitable until the underlying dips below $45 before expiration. At this point and lower, half of the short puts are uncovered. TGT closed today at $49.26.

The line shown is the break even price level. You can see that the $45 underlying price level was strong support since it last touched in December 2010. The 52-week range is a low of $48.23 and a high of $60.97. Target traded 67,906 contracts today compared to average daily volume of 37,149. Target Corporation will release Q1 2011 earnings on May 18th.

According to Google Finance, Target has a low P/E ratio and Price-to-book ratio, but a higher Price-to-sales ratio compared to Wal-Mart. Research analysts at Citigroup lowered their price target on TGT from $69 to $68. Furthermore, analysts at Barclays cut their price target on shares of Target from $65 to $60.

No position at this time. Position declarations are believed to be accurate at time of writing but may change at any time and without notice.

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