Dollar Tree (DLTR), the North American discount retail chain, saw its stock drop in Thursday’s trading session following disappointing earnings results from competitor Dollar General. Dollar Tree is set to release its second-quarter earnings report on Wednesday, September 4th.
Recently, Dollar Tree’s stock has recently completed a bearish Head & Shoulders pattern, a classic bearish technical signal identified by Trading Central Technical Insight, reaching the target area of around $93.
Contrarian traders might view this decline as excessive and could see it as a potential opportunity for a rebound.
What does Trading Central Options Insight indicate about the current volatility of Dollar Tree’s options, and which strategies are recommended for a rebound scenario?
The TC Options Insight Dashboard indicates Dollar Tree’s Implied Volatility Rank stands at 57, reflecting an elevated level compared to 52 just a week ago. The current options chain shows a relatively neutral volatility skew, with short-term options commanding higher premiums than their long-term counterparts as next week's earnings announcement approaches.
Implied volatility is currently at 60.1%, significantly exceeding the historical volatility of 31%, with a ratio of 1.94. This disparity suggests that there may be opportunities for option strategies that focus on selling premium.
Dollar Tree is anticipated to experience a price move of approximately 16.1% by the October 18th monthly options expiration. This projection suggests a potential increase to $100.42 or a decrease to $72.50.
Using TC Options Insight strategy lab, we looked for Dollar Tree option strategies that have a slightly bullish bias with a focus on selling premium due to the increased volatility ahead of the company's earnings release based on the volatility data inside the TC Options Insight Dashboard. Two Bull Put credit spreads were identified.
The preferred October 18, 85-80 Bull Put Spread offers a maximum profit of $220 per contract and a maximum risk of $280 per contract. The break-even price for this strategy is $82.80, providing a probability of profit of approximately 62%.
A Bull Put Spread is a bullish credit strategy where an investor sells a Put option and simultaneously buys another Put option with the same expiration date but at a lower strike price. The potential profit is capped at the net premium received. This premium selling strategy falls within the expected move as indicated in the volatility cone on the chart below.
For those that are focused solely on options strategies that limit downside risk, quickly changing question #3 to "Limiting my risk" results in 3 unique option strategies, a Bull Call Spread with an ideal probability of profit at 46% (Closer to 50% the better) a long call, and another Bull Put Credit spread with a high Probability of Profit of 72%.
Options Insight is designed to introduce retail stock traders to the benefits of options strategies. It helps those who have never traded options understand how these strategies can replicate being long or short on stocks with reduced risk. Additionally, it emphasizes the significance of volatility and expected price movement in selecting strike prices.
The investment ideas presented here are for information only. They do not constitute advice or a recommendation by Trading Central in respect of the investment in financial instruments. Investors should conduct further research before investing.
Gary Christie is head of North American research at Trading Central in Ottawa.
