DLTR Analysis

Dollar Tree Inc. (DLTR)

DLTR publishes earnings on Tuesday before the opening bell.

I shall use options that trade for the last time 11 days hence, on Dec. 1.

Implied volatility stands at 35%, which is 3.3 times the VIX, a measure of the volatility of the S&P 500 index.

DLTR’s IV stands in the 59th percentile of its annual range and the 86th percentile of its most recent broad movement.

The price used for analysis was $97.96.

Premium: $4.77 Expire OTM
DLTR-if Strike Odds Delta
Calls 105.00 86.6% 15
Break-even 101.77
Short 97.00 52.0% 51
Short 97.00 48.0% 49
Break-even 93.77
Long 89.00 83.8% 14

The premium is 60% of the width of the position’s wings.

The risk/reward ratio is 0.7:1.

The zone of profit in the proposed trade covers a $4 move either way. The biggest immediate move after each of the past four earnings announcements was $6.69, and the average was $2.94. After eliminating the maximum and minimum post-earnings movements, the central tendency is $2.45.

The expected move covering 85% of occurrences is $5.23, beyond the profit zone.

The bid/ask spread is 26.7%.

Decision for My Account

There are several reasons to dislike this trade. The options grid widened from $2.50 between strike prices to $5.00, causing some distortion to the trade structure. This lowered the risk/reward ratio to 0.7%; my goal is even odds, or a range of 1.2:1 to 0.8:1. And the bid/ask spread for the position as constructed is 26.7%, well above my maximum of 10%. I’m passing on this trade.

By Tim Bovee, Portland, Oregon, November 20, 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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