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Unusual Options Activity: Target (TGT)

Posted: 28 Oct 2019 03:00 AM PDT

In-the-money put trade indicates potential move from $110 range.

Retail giant Target (TGT) saw an unusual put option trade via the December 20th $115 puts. With shares at $109.60, the option is already in-the-money by $6.40, and could be exercised by the option buyer at any time.

With a $8.45 premium on average, the option buyer could exercise by selling shares to the option seller at $115 , and get shares for approximately $106.50 right now, after accounting for the premium.

However, the put seller is obligated to buy shares at $115, so their expectation is for a rally in shares in the next 53 days before expiration. With over 7,100 contracts trading against a prior open interest of 204, both buyers and sellers have strong views on shares moving at least $5 either way from here.

Action to take: Shares of Target are trading a bit off their recent highs, at a reasonable price up to $112.00. The retailer has been doing well building out its online presence, and it continues to get high foot traffic in its stores, making for a better long trade than a short.

When it come to selling put options (a great way to make income with options) a better strategy is to use out-of-the-money puts instead. Traders who sell to open a December $105 put option, for instance, can receive $3.30, or $330 per contract.

If shares stay over $105, traders won't be on the hook to buy shares at expiration.

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Two Surprising Large-Cap Companies Hedge Funds Love Now

Posted: 28 Oct 2019 03:00 AM PDT

Follow the smart money for market-beating profits.

Hedge funds are often some of the smartest players in the room, and usually the biggest. With their deep pockets, they can take controlling stakes in smaller companies… but many funds also build holdings in large, well-established firms as well.

Those holdings tend to outperform the overall market by at least half a percent per year, an outperformance that adds up over time. Following this "smart money" of the investment world can give you an edge over other investors.

Let's look at two large-cap companies where hedge funds are overwhelmingly bullish—but also companies that have further upside in shares, and where options traders can beat the pants off the pros who run hedge funds.

Hedge Fund Pick #1: Microsoft (MSFT)

With a $1 trillion market capitalization, it's clear that Microsoft (MSFT) is doing more than just selling copies of the latest version of Windows. Although the company doesn't have the same cool factor as Apple or the "what will they do next" vibe of Amazon, the company has thrived in the 21st century, moving past its roots as a player for the PC era.

In fact, the company has quietly built out a diversified series of tech holdings over the years, from software and video games, to increasingly cloud-computing with its Azure division. The company's profit margin is over 31 percent, and it's continuing to grow revenues at over 13 percent per year and earnings at over 20 percent —huge numbers from an already-monster-sized company, and improving ones at that.

So even though shares of the company are riding high, chances are they'll keep heading higher in the future thanks to these trends. It's no wonder that over 128 hedge funds with the best long-term investment success record have shares of the technology king, and why 70 of them have the company as a top 10 holding.

Investors looking to buy Microsoft today will pay pretty close to all-time highs, but with a bright future ahead, shares aren't too expensive up to $142.00. The company does pay a dividend, although the current yield of 1.4 percent is a little stodgy, the company can make up for it on the growth factor.

Given how shares have beaten the market handily this year with a 30 percent rally, speculators may want to consider buying a call option to play that trend further.

A January 2021 $150 call option, trading for around $10.55, or $1,055 per contract may sound expensive, but compared to buying 100 shares, it's a cheap way to bet on a further move higher. A move to $180 would lead to an option worth $30 at expiration over a year from now for a clean triple—that's how you use the smart money of a hedge fund to get a hedge fund-like return!

Hedge Fund Pick #2: Alibaba Group Holdings (BABA)

Alibaba (BABA), the Chinese-based internet retailer, essentially the country's Amazon, has been holding up well despite a significant slowdown in economic growth there. With over 1 billion potential customers and with an economy with one of the world's fastest—and largest—growing middle classes, it's a play on Chinese demographics that can reward investors hugely in time.

That's why it's no surprise that 97 of the top hedge funds have shares, and 54 of them also have the company as a top 10 holding. Although shares are up 24 percent in the past year, the company's rapid growth is moving valuation from 50 times earnings to just 20, as earnings have grown by triple-digits in the past year and revenues have risen by over 42 percent.

With shares trading as high as $195 in the past year, traders have a chance to buy a great name below its high point, given their current price around $174. Shares are a buy up to $175.

Although Chinese stocks can be volatile, this is another company on a long-term upward trend where buying a call option can provide a market-trouncing return. The January 2021 $175 calls, essentially right at-the-money, are trading for around $26.00, or $2,600 per contract.

That's still cheap compared to buying 100 shares outright, and a move back toward the old high right now should move dollar-for-dollar as the option goes in-the-money. A push to $250 in shares would triple the value of the options to $75 at expiration, more than a year down the road… a price achievable with a potential trade deal!

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Insider Activity: JP Morgan Chase (JPM)

Posted: 28 Oct 2019 03:00 AM PDT

Director makes $1.99 million buy.

Mellody Hobson, a director at JP Morgan Chase (JPM), picked up 16,000 shares recently, increasing her stake in the company by 15 percent. At current prices, the buy came to $1.994 million, and leaves the director with just over 117,000 shares.

Insider data shows that the banking behemoth has had a mix of insiders both buying and selling in the past few years, which is typical of big companies that pay executives in stock options.

Shares of the company trade under 13 times earnings, and the company has expanded its dividend payout for a 2.9 percent yield at present, all while outperforming the market by 8 points in the past year.

Action to take: Among the largest five mega-banks, it's tough to find a better run company than JP Morgan Chase under CEO Jamie Dimon. It's a worthwhile holding for anyone interested in the banking sector, and the company's continued growth in a potentially slowing economy is likely to continue. Shares are a buy up to $130.00.

Traders may want to bet on the continued trend higher with a call option trade. The June 2020 $130 calls, at just $6.40 or $640 per option contract, are a cheaper way to control 100 shares without ownership. A continued move higher in shares could give a high-double digit return in the next few months, possibly into a triple-digit return, without too much risk.
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