A flurry of recent options trades has experts divided on the future of Target Corporation’s (NYSE:TGT) stock price.
For example, DA Davidson has placed a buy rating on Target with a price target of $171. Meanwhile, B of A Securities has downgraded its rating to neutral with an eventual price target of $165.
Target Corp. (NYSE:TGT) was trading at 145.80 on July 6.
One reason for the varying analyst views on Target is recent action by big money options traders.
Benzinga reports 26 “uncommon options trades” for Target over the past three months – including a recent big bearish move by one unidentified options trader.
In an article on the current state of Target options trading, the site says when big moves like that occur, it’s usually a sign that “somebody knows something is about to happen.”
So let’s take a closer look at what retail traders can gain from watching options trading action.
Options Trading Basics
Stock options are a member of a family of instruments known as derivatives. Financial derivatives are valuable only because they are linked to an actual commodity or security, such as crude oil, Mexican pesos, or coffee beans.
The value of any derivative is contingent upon or derived from, the status of and movements in the underlying security. The more common derivatives include forwards, futures, swaps, and, of course, options.
Derivatives are agreements entered into today with life spans that extend days, months, or even years into the future. This forward-looking characteristic of the derivatives family gives the people who trade them the unique ability to place bets on or protect themselves against what might happen in the future.
Where do Options Fit in the Derivatives Family?
Options give their holders the right to buy or sell the named security in the future at a fixed price.
Traders can use these stock options to meet an array of financial objectives – they bring flexibility to investing unmatched by traditional buy-and-hold securities like stocks and mutual funds.
The versatility and customization possibilities inherent in stock options make them a useful tool to so many investors. For example:
- Stock options can be used as an insurance policy to protect against losses in a stock position. The portfolio managers behind some of the most conservatively run pension funds and mutual funds use options precisely in this way. And as an insurance vehicle, stock options are perfectly appropriate for the average investor; they’re especially valuable to people who have a significant portion of their wealth tied up in a single stock.
Employees who receive their companies’ stock as part of their compensation packages are a prime example.
- Stock options can also be part of a more aggressive strategy, and it’s here that they’ve earned a reputation as playthings of the reckless. And it’s true: some brave investors use them to make highly speculative, risky wagers.
However, it is possible to make bets with stock options and limit the downside. In fact, traders can use stock options in nearly infinite combinations to achieve many different risk-reward profiles.
So What is Options Trading Telling Us About Target Right Now?
Despite the recent activity, most analysts remain bullish on Target Corp. (NYSE:TGT), while big-money traders appear to be bearish on the stock by approximately 53% to 46%, again, according to Benzinga.
As for analysts, Telsey Advisory Group has placed an outperform rating on the retail chain with a price target of $185. Likewise, Raymond James has issued a strong buy rating for Target with a price target of $190.
Featured Image: Megapixl @Nicoelnino
