DG Analysis

Dollar General Corp. (DG)

Updated 8/31/2017: DG fell about $6.50 after earnings were published and then recovered about $2 in the ensuing three hours of trading. It came very close to meeting expectations of $1.09 per share, coming in with an eps of $1.08.

Shares showed a net declined of 3.8% over my one-day holding period, o a -1,368% annual rate. Tye options position produced a 33.4% yield on debit for a +12,202% annual rate.

The stock’s move of $2.85 was well below the expected $4.25, which puts it in the same group as 85% of earnings announcements, statistically speaking.

The move was also less than DG has showed historically after earnings, coming in at about half the average, a fifth of the maximum, and a bit less than three-fourths of the central tendency.

Zacks Investment Research listed DG with an earnings surprise predictor score of -0.37, suggesting that there would be a small negative surprise. The beta is 0.93.

DG publishes earnings on Thursday before the opening bell.

I shall use options that trade for the last time nine days hence, on Sept. 8.

Implied volatility stands at 36%, which is 3.2 times the VIX, a measure of the volatility of the S&P 500 index.

DG’s IV stands in the 80th percentile of its annual range and at the peak of its most recent broad movement.

The price used for analysis was $76.03.

Premium: $4.59 Expire OTM  
DG-iron fly Strike Odds Delta
Long 85.00 91.7% 10
Break-even 80.59 ~77.0% ~26
Short 76.00 51.5% 52
Short 76.00 48.6% 48
Break-even 71.59 ~74.0% ~23
Long 67.00 89.3% 9

The premium is 50.2% of the width of the position’s wings.

The risk/reward ratio is 1:1.

The zone of profit in the proposed trade covers a $4.50 move either way. The biggest immediate move after each of the past four earnings announcements was $16.18, and the average was $6.30. After eliminating the maximum and minimum post-earnings movements, the central tendency is $4.32.

The expected move covering 85% of occurrences is $4.25, within the $4.50 break-even width.

The bid/ask spread is 6.5%.

Decision for My Account

I have entered an order on DG as described above. The stock at the time of entry was priced at $76.04.

The high maximum post-earnings move bumped the average up to an extraordinary high level among the last four announcements. Therefore, in deciding to take the trade, I gave greater weight to the central tendency — which discards the outliers and which is within the zone of profit.

By Tim Bovee, Portland, Oregon, Aug. 30, 2017


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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