My friend over at Bloomberg just reminded me of a story I had on August 9th via Bloomberg on Dollar Tree (DLTR):
By Jeff Kearns
Aug. 9 (Bloomberg) -- Dollar Tree Inc. options trading
jumped to 10 times the four-week average, with most of the
volume concentrated in a bet that the retailer will extend this
year’s 34 percent surge and reach a record by November.
An investor bought 5,000 November $45 calls while selling
the same number of November $40 puts, according to Joe Kunkle,
founder of OptionsHawk.com, a Boston-based provider of options
market data and analytics. A total of 11,088 contracts on the
company changed hands as of 3:03 p.m. New York time.
The strategy, known as a bullish risk reversal, profits if
the shares exceed the higher strike price by expiration. The
stock, which has never closed above $45, snapped a five-day
losing streak by climbing 2.6 percent to $43.13.
My actual note to clients that day was:
Dollar Tree (DLTR) shares are rebounding 2.55% today after 5 consecutive down days after August put buying was noted. Perhaps the optimism is on strong McDonald's sales that shows consumers are still trading down, a good thing for a dollar store. Dollar Tree will announce earnings on August 19th and a trader put on a large, 5,000 contract, November $45/$40 bull risk reversal for a $0.30 debit today. Options volume is 8X average due to the trade and the trade is looking for an upside move in shares beyond recent $45 highs. Shares trade 12.55X earnings, 0.99X sales, and 13.85X cash flow, a very cheap retailer. Strong results were already reported at 99 Cent Stores (NDN) and Family Dollar (FDO). IBD and Barron's were both out positive on shares in late July, while Goldman was cautious in early July.
Looking at where Dollar Tree closed today that $0.30 debit on 5,000 contracts, a $150,000 investment, closed today to mark at $8.40, a 2700% gain, or a $4,050,000 gain!
Once again...it pays to follow the smart money, and in this case shares trended higher for months, never really looking back, but it did require the patience to hold steady in the position, although the trader could have taken more gains on the initial earnings surge.
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that's incredible. you pointed this out the very day the trade was made?
ReplyDeleteYes I did
ReplyDeleteOptions strategies can be created to make money in rising or declining markets, markets with no price movement, explosive markets where the direction is unclear and as a hedge to protect profits.
ReplyDelete