Monday, November 23, 2015

DLTR Analysis

1/12/2016: DLTR neared expiration with little sign of returning to profitability. I exited to avoid further losses. The exit premium was a $2.00 debit, ore 208% of the entry credit, with shares at $77.82.

Shares declined by 12.2% over 50 days, or a +89% annual rate. The options position produced a 132.5% loss on debit for a -967% annual rate.

The discount general merchandise retailer Dollar Tree Inc. (DLTR), headquartered in Chesapeake, Virginia, publishes earnings on Tuesday after the opening bell.

[DLTR in Wikipedia]


I shall use the JAN series of options, which trades for the last time 53 days hence, on Jan. 16.


Implied volatility stands at 40%, which is 2.6 times the VIX, a measure of volatility of the S&P 500 index. DLTR’s volatility stands in the 91st percentile of its annual range.

Ranges implied by options and earnings
WeekSD1 68.2%SD2 95%Earns
Implied volatility 1 and 2 standard deviations; maximum earns move

The Trade

DLTR began a weak reversal to the upside on Oct. 15 within a larger decline that began March 24.

Zacks Investment Research is neutral DLTR, with a rank of 3, but with a 1.85% expectation of a negative  earnings surprise. Zacks has concluded that its earnings surprise prediction system is no different from random chance for negative surprises.

Analysts are fairly neutral, as well, with an enthusiasm index of 5%. Out of analysts following the symbol, 48% have given it a Strong Buy recommendation.

Three of the last four earnings announcements have resulted in price rises.

I shall structure a neutral trade offset to the downside to accommodate the not-very-reliable negative earnings surprise prediction.

Iron condor, short the $75 calls and long the $77.50 calls,
short the $57.50 puts and long the $55 puts,
sold for a credit and expiring Jan. 17.
Probability of expiring out-of-the-money


The premium is $0.65, which is 26% of the width of the position’s wings. The stock at the time of entry was priced at $69.34.

The risk/reward ratio is 2.81.

The zone of profit in the proposed trade covers an $8.75 move either way. The biggest immediate move after each of the past four earnings announcements was $6.61, and the average was $3.49.

Decision for My Account

I've entered a position on DLTR as described above

-- Tim Bovee, Portland, Oregon, Nov. 23, 2015


Tradecraft: Playing the odds to build winning stock market trades from options, a description of how I trade, can be read here.


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Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decisions for his or her own account, and take responsibility for the consequences.

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