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The Retailer Sold Off Following Earnings Beat, What to Do?

The Retailer Sold Off Following Earnings Beat, What to Do?

There is always a quandary that follows when a stock falls on earnings that appear to look really strong. The lower price could encourage buyers to come in. However, it may be the signal that the sellers are about to establish control and the top is in.

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  • This was the case for Target Corp (TGT) on Wednesday. The initial reaction was to open slightly higher than the previous day, but then quickly sagged to finish 2.87% lower. In after hours trading, the price appears to have stabilized, but we’ll see what today’s trading brings.

    While the stock sold off, the underlying report was strong. The significant growth in their digital sales business was a big and an indication that the company may have the chops to compete in the non-brick and mortar world.  The wrinkle that may have spooked investors could be the increased costs due to COVID-19.

    Technically, the stock is trading near its 52-week high and has rallied significantly in recent weeks. For the stock to take a breather, similar to Amazon (AMZN) and Walmart (WMT) makes sense.

    The near-term prospects for the stock is to retest its recent high near $126. However, a breakout to a new high is very likely in the coming weeks.

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  • Option traders may want to consider a trade that has no risk to the downside and unlimited profit to the upside. This is accomplished through by using a call ratio backspread. The 26 JUN 20 120/126 ratio backspread can be bought for a $0.01 credit. This entails selling one contract at the $120 strike and 2 contracts of the $126 strike. If the bottom falls out of the stock and it finishes below $120 by expiration, there isn’t any risk. If the price finishes at $126, the max loss of $600 is established. The upper breakeven is at $132. However, the intent is to close 2 weeks before expiration if ITM or a move to $130 or higher.