Options Trading: Buying Puts On TJX

| April 4, 2012 | 0 Comments

The TJX Companies (TJX) has had a great run…

The low-end retailer’s stock has shot up nearly 80% since the beginning of 2011.  But that’s just the tip of the iceberg…

TJX has gone parabolic since a 2 for 1 stock split on February 3, 2012.  It’s up more than 15% in the eight weeks since the stock split.

Here’s the thing… I don’t understand why TJX is rocketing higher right now.

A 2 for 1 stock split isn’t any reason for a stock to move higher.  And TJX’s most recent earnings and outlook merely met expectations.  They certainly weren’t reason enough to send the stock 15% higher.

And it doesn’t get any better when you dig deeper into TJX’s fundamental story.

A good portion of TJX’s earnings gains are due to an aggressive stock buyback plan.  The company’s repurchased nearly 200 million shares over the last few years.

That’s great… but it can’t go on forever.  In order for TJX to continue growing earnings, revenue must be growing as well.

Get this, last quarter’s sales were up about 6%… but earnings per share shot up 50%.

No question about it, earnings growth is running well ahead of sales growth.  That’s a clear sign TJX could run into trouble when their share repurchases slow down.

And it’s not just fundamental data pointing to a coming drop in share price for TJX.  Technical analysis shows the stock is deep into overbought territory.

 

TJX Chart

As you can see, the 150-day moving average (gray line) shows you TJX’s long term uptrend.  Right now the moving average is at $31.82.  But TJX is trading well ahead of its uptrend at $39.71.

We’ve all seen this type of overly bullish trading action before…

It’s just a matter of time now before TJX pulls back to its long term uptrend.  And that means the shares are due for a major correction.

But a word of caution…

Don’t run out and short TJX stock.

That carries too much risk.  In fact, it carries unlimited risk… So shorting a stock with strong bullish momentum is never a good idea.  It’s just too hard to pick the absolute top.

Buying put options on TJX is a better way to make a bearish play on this overvalued stock.  Remember, when you buy a put, your risk is limited to the cost of the option.  That’s much safer than being exposed to an unlimited amount of risk when shorting the stock.

As an added bonus, volatility is very low in TJX.  So the options are cheap.  If the market hits a rough patch, the options will likely increase in value from the uptick in volatility alone.

Take a look at the TJX October 2012 $35.00 puts for about $1.15.  They offer plenty of upside with limited risk.  When TJX comes back down to earth, you’ll be raking in the profits hand over fist!

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Category: Options Trading

About the Author ()

Corey Williams is the editor of Sector ETF Trader, an investment advisory service focused on profiting from ETFs and the economic cycle. Under Corey’s leadership, the Sector ETF Trader has become one of the most popular and successful ETF advisories around. In addition to his groundbreaking service, Corey is the lead contributor to ETF Trading Research, where he shares his insights about ETFs and financial markets on a daily basis. He’s also a regular contributor to the Dynamic Wealth Report and the editor of one the hottest option trading services around – Elite Option Trader.

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