Mike Khouw's Target Trade

Mike Khouw said on CNBC's "Options Action" that Target Corporation TGT is trading quite rich to itself, and sometimes when you see stocks run towards the upper end of their own historical valuations, you can run into a little bit of trouble. He doesn't take issue with Target fundamentally because the company is making a lot of right moves with digital sales and it is also trading cheap to many of its comps.

To make a bearish trade, Khouw wants to buy the April $180 put for $7.20 and sell the March $170 put for $2.35. The trade would cost him $4.85 and it can maximally make a profit of $5.15. When the March put expires, Khouw can sell additional puts and increase his profit potential. He decided to use a calendar spread because the near-dated options are elevated as the company reports earnings on Tuesday.

Carter Worth of Cornerstone Macro has also noticed some bearish signs. The sector has started to roll over and Target hasn't. He said one technique in markets is when the group starts to falter, find one that hasn't and go after it. Target has also just broken its uptrend line and Khouw expects it to drop to its 150-day moving average.