Target Stock Overreaction - Huge Unusual Put Option Volume Signals TGT's Drop is Overdone

TGT closed at $125.01 on Friday, up +2.42% from its day-before trough price of $121.59. This was a $34.59 or -22% decline from its price of $156.56

Target Corp (NYSE:TGT) stock has dropped 20% since its disappointing Q3 earnings on Nov. 20. But on Friday, Nov. 22, TGT stock began to rebound, rising 2.42% for the session. It closed at $125.01, up from the day-before trough price of $121.59.

However, TGT stock is still down $34.59, or 22%, from its price of $156.56 before the earnings release. But several analysts, including me, believe that TGT stock has overshot to the downside and is now undervalued.

I discussed this situation in my Nov. 20 Barchart article, “Target Stock Overreaction - Huge Unusual Put Option Volume Signals TGT's Drop is Overdone.” I argued that TGT stock was worth at least $143 per share, based on the company's likely free cash flow (FCF) margins next year.

That means that even after Friday's gain, TGT stock is still worth 16% more. Here's how I arrived at that valuation.

Based on analysts' forecasts of $109 billion in revenue next year, with a 2.0% FCF margin, free cash flow could be $2.18 billion. Even if FCF drops to $2.00 billion, TGT stock could still be cheap. Here's why.

Using a 3.0% FCF yield, the market valuation would eventually be worth $66.67 billion ($2.0b in est. FCF 2025 / 0.03 = $66.67 billion).

This is 16.1% higher than its market cap of $57.41 billion today ($66.67b target mkt cap / $57.41 = 1.161).

In other words, TGT stock is worth 16.1% more than $125.01 ($1.161 x $125.01 = $145.13 per share).

Other analysts see the stock as undervalued as well.

Analysts See TGT Stock Undervalued

For example, Yahoo! Finance says its survey of 37 analysts shows an average price target of $143.41 per share. That is close to my price target and still 14.7% higher than today's price.

In addition, Barchart's survey has a mean target price of $156.90 or 25.5% higher. Similarly, AnaChart.com, a new fintech site that tracks sell-side analysts and their price targets, shows that the average of 23 analysts is $153.95 per share, 23% higher than Friday's close.

The bottom line is that Target stock now looks undervalued. But it could take a good while for the stock to rebound. After all, investors are nervous that Target's holiday season might not turn out well.

Therefore, let's look at an alternative way to play TGT stock: buying long-dated call options with in-the-money (ITM) strike prices.

In-the-Money Long-Dated TGT Calls

For example, look at the Jan. 16, 2026 expiration call option chain. This is 421 days from now, or almost 1 year and 2 months away. That allows the investor to hold these calls over one year and potentially not have to pay short-term capital gains taxes on any profits.

Here is what is interesting. It makes sense to buy in-the-money (ITM) call options since these already have some intrinsic value embedded in their price. That provides some degree of downside protection as well as providing good leverage on the upside.

For example, look at the $110.00 strike price calls. These are trading $15.01 below the $125.01 trading price, and so are already worth at least that amount.

However, the midprice premium is $23.50, meaning there is $23.50-$15.01, or $8.49 of excess or extrinsic value in the price. But, at least the intrinsic value represents 64% of the total premium paid.

Moreover, the advantage is that to buy 1 contract representing 100 shares the outlay is only $2,350 per call option. To buy 100 shares at today's trading price, the investor would have to pay $12,501 (i.e., $1