The China-driven market selloff may have all of Wall Street on its heels at the moment, but there are still trading opportunities to be found, even in this malaise.
For instance, discount retailer Dollar General (DG) is on tap to release its second-quarter earnings report after the bell this Thursday. With shares trading at a steep discount to recent levels, Dollar General stock options traders should take a serious look.
Diving into the numbers, Wall Street is looking for a second-quarter profit of 94 cents per share out of Dollar General, a figure that is up 13% from year-ago levels and surprisingly in line with EarningsWhisper.com’s whisper number. Revenue, meanwhile, is seen coming in up 8.7% at $5.14 million.
Overall, the brokerage community is rather bullish on Dollar General stock’s prospects. Data from Thomson/First Call reveals a hefty 20 “buy” ratings, compared to seven “holds,” and just one “sell.” That said, prior to the market selloff of the past two sessions, Dollar General stock was trading just shy of the consensus 12-month price target of $85 per share.
In other words, Dollar General stock stock was on a collision course with either a handful of downgrades to bring expectations in line with ratings, or a series of price-target increases to match the slew of “buy” ratings. It stands to reason that as long as Dollar General meets expectations and doesn’t offer any surprises in regard to guidance, DG stock should still be an intermediate-to-long-term buy, according to analysts.
Dollar General Stock Opinion
That said, short sellers are showing signs of skepticism. During the most recent reporting period, the number of DG shares sold short jumped by 24% to 6.1 million shares. This accumulation of shorts still only makes up about 2.18% of DG’s total float, so a short squeeze isn’t very likely, but this rising negativity is something to keep an eye on in the long term.
Options traders are also bearishly aligned when it comes to Dollar General stock. Specifically, the August/September put/call open interest ratio for the shares comes in at 1.12, with puts easily outnumbering their bullish counterparts. Furthermore, this ratio rises to 1.19 when we zero in on just the weekly August 28 series options — i.e. the ones that are directly affected by Thursday’s earnings report.
That said, this week’s heavy market selling likely had some impact on put OI levels, so this sentiment data should be taken with a grain of salt.
Click to Enlarge Heading into Thursday’s report, weekly August 28 series implieds are pricing in a potential post-earnings move of about 3.4%. This places the upper bound at $80.01 and the lower bound at $75.
Obviously, with DG hitting a low near $70 yesterday, implieds have not factored in another steep market selloff, with the bounds corresponding roughly to longer-term support/resistance levels for DG.
The $80 level is key here for bullish traders, as it is an area of chart resistance that has kept the stock pinned down for the past month. A breakout here would be big for long-term DG bulls.
2 Trades for Dollar General Stock
Call Spread: Admittedly, call trading in the current China-driven market environment is risky. However, Dollar General was already showing firm price action prior to the selloff, and a bounce back to pre-selloff levels could be in the cards following a solid quarterly report.
As such, traders looking to bet on a post-earnings DG bounce might want to consider a September $77.50/$80 bull call spread.
At last check, this spread was offered at 85 cents, or $85 per pair of contracts. Breakeven lies at $76.65, while a maximum profit of $1.45, or $145 per pair of contracts, is possible if DG closes at or above $80 when September options expire.
Put Sell: On the other hand, those with a bullish-to-neutral bias on DG might consider a weekly August 28 series $73 put sell position. At last check, the August $73 put was bid at 62 cents, or $62 per contract.
The upside to this put sell strategy is that you keep the premium as long as DG stock closes above $73 when these options expire at the end of this week. The downside is that, if DG trades below $73 ahead of expiration, you could be assigned 100 shares for each sold put at a cost of $73 per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
