It’s time to reconstruct our Target (TGT) LEAP call spread, which will require putting more capital to work.
The stock topped out in November 2021, falling on interest rate fears and economic concerns. In May, shares sold off dramatically following a big first-quarter earnings miss. Luckily, we had a protective put in place, which allowed us to reduce our cost basis on the position by more than $35 per share.
Target reported second-quarter earnings this week that showed a nearly 90% year-over-year plunge in profits and fell well short of expectations. Yet, the market’s reaction was much more muted than it was back in May.
Revenue was in line with expectations and management maintained its full-year sales guidance for low-to-mid-single-digit growth.
Retail stocks have shown strength over the past month. And with Target and Walmart (WMT) reaffirming their guidance, the worst may be behind us.
To reconstruct our position, we must first sell our January 2023 call. The price is significantly below our cost basis, and the difference will be factored into the new cost basis.
Next, I am recommending a new LEAP call spread, buying a January 2024 LEAP with a much lower strike price and selling a short-term call against it to generate income. As I said above, this will require putting more money to work. However, I believe this is a long-term position worthy of our capital.
Current Stock Price: $167.90
Cost Basis: $17.57
Action:
- Sell to close the TGT Jan 2023 (1/20/23) 200 Call for around $3.95
- Buy to open the TGT Jan 2024 Monthly (1/19/24) 150 Call for around $37.25
- Sell to open the TGT Sep Week One (9/2) 180 Call for around $0.57
New Cost Basis: $50.30