Mid-Day Market Call for Tuesday, 1.28.14

S&P 500 (SPX) – At the time of this broadcast, SPX was around 1,786.90 up 5.34 from yesterday’s close. We have a breakdown from the short term trendline going back to September. It is also below its 50 day moving average of 1812.87. The chart suggests that there is something definitely different in this market lately. “It might not be the end of the world, but the accelerated trendline is broken down,” according to Michael. The long term upwards trend from November of 2012 remains intact. The 1775 area is a support level many analysts were mentioning. This is a level to watch in the near term.

It is above the 200 day moving average of 1697.36.

The Chart of the Day is Target Corporation (TGT) – At the time of this broadcast, TGT was at 58.01 up 0.30 from yesterday. This is not a popular stock lately with all the news about the credit card scandal. It is way below its averages now. The 50 day moving average is 62.60, the 200 day is 66.54. The stock fell hard and fast and looks to be at a support level established a year ago. “Sentiment is bad and retail has been beaten up recently, but this could be oversold,” according to Michael.

Analysis of TGT’s Dividend and Volatility Chart and from TradeKing’s Brian Overby:

The 30-day implied volatility has spiked up above 20% recently, which is near the 52-week high in IV for Target. Earnings are expected to be announced on February 26th, which is within the 30-day IV period displayed on the chart and is probably the reason why we see the recent spike up. However, Target does have weekly expiration option contracts. If we look at the weekly contract that expires in 17 days on 2/14 (before the earnings announcement) the recent IV spike up should not be as much of a factor in the option prices.

Also, the stock is going ex-dividend on 2/14/14. The projected amount is 43 cents per share. A dividend of that size will be reflected in the prices for the put and call option contracts. When a stock goes ex-dividend the stock price is lowered by the amount of the dividend. This increases put option contract prices and decreases call option contract prices respectively.

                 Brian Overby’s strategy based on Michael’s analysis:

With Michael’s bullish forecast based on the thinking that TGT could be oversold and at support levels, Brian discusses a Long Call with an expiration date before the earnings announcement and a Long Calendar Spread with Calls that combines the use of a contract that expires before the proposed earnings announcement and one with an expiration after the earnings announcement.

Brian’s Potential Trade Strategy – Long Call

– Buy 1 Feb 14 2014 TGT 56.00 Call

– 17 days to expiration

– Bid 2.20, Ask 2.37 for the option

– Debit is $2.37 if we execute at the Ask.  Breakeven at $58.37 without commission.

– Maximum potential loss is $2.37

– Maximum potential gain is unlimited if the stock goes to infinity (Not likely to happen).

– Total commission to enter this trade is $5.60


Brian’s Potential Trade Strategy # 2 – Long Calendar Spread with Calls

– Buy 1 Feb 28 2014 TGT 60.00 Call

– Sell 1 Feb 14 2014 TGT 60.00 Call

– 17 days to the Feb 14 expiration, 31 days to the Feb 28 expiration

– Net Bid 0.28, Mid 0.31, Ask 0.35 for the strategy

– Net debit is $0.35 if we execute at the Ask.

– Maximum potential loss is $0.35

– Maximum potential gain is limited to the premium received for the back-month call minus the cost to buy back the front-month call, minus the net debit paid to establish the position. NOTE: You can’t precisely calculate your max gain at initiation of this strategy because it depends on how the back-month call performs.  Regards, Brian Overby  TradeKing Options Guy and Senior Option Analyst