Anshul Agarwal's Option Trade On Target Corporation Going Into Its Earnings

Target Corporation TGT is all set to release its first-quarter results next week. Bay Crest Partners Equity Derivatives Strategist Anshul Agarwal was on Bloomberg TV Friday to share his option trade on Target going into its earnings.

The Trade

I am not terribly optimistic about the big retailers to begin with. In fact, I am somewhat bearish on Target and my trade on Target even though it reports next week is more a two-months trade where I want to buy a July 75 Put and Sell the July 70 Puts to offset the cost of it, it’s about $1.15 or so it costs to put it on. I think it’s a great risk-reward.”

The Idea

Agarwal also explained the reasoning behind the trade, saying, “But the overall idea is with rates coming up and as a result of bond selling off, the 10-year versus the yield on the Target is like 2.17 on the 10-year versus 2.60 something as the yield on Target, dividend yield on Target.”

“So, you have that sort of multiple compressions also a possibility in retail stocks, where you would see even though the broader indices will maintain their levels near a record all time high.”

“But the stocks that are dependent on the economy per se like the retail stocks are going to continue to have some sort of a compression of their P/E multiples and it is quite possible that we start to see some sort of slow sell-off into the summer period,” Agarwal said.