Block Trade – Near Term Neutral – Long Term Bullish Trade in $TGT

Target (TGT) reported earnings before the open this week on Wednesday the 19th. It appears a trader who is long term bullish, but short term neutral came into the market Tuesday and expressed this outlook using a diagonal spread.   Specifically they purchased TGT Sep 18th 82.50 Calls for 1.18 and sold the same number of TGT Aug 21st 82.00 Calls for 0.68 and a net cost of 0.50. All this was done when TGT was trading around 80.35. The payout for August 21st expiration appears below and an explanation follows.


The payout diagram above uses the assumption that the TGT Sep 18th Call has an implied volatility of 20%, which is a tad lower than where it is as I write this blog. The stock has held up fairly well since earnings, despite the stock market coming under pressure. The trader probably would like to see TGT closer to 82.00 than 80.00, since the goal here is for the 82.00 call to expire with no value and have the maximum potential value for the remaining open position.

Assuming the stock closes tomorrow (August 21st) under 82.00 the result will be a long position in the TGT Sep 18th 82.50 Call with a net effective cost of 0.50. With this result the payoff is a traditional ‘hockey stick’ looking long call position which appears in the diagram below.