DG Analysis

Dollar General Corp. (DG)

Update 12/7/2017: DG’s earnings came in 1.1% below below expectations. The share price rose about $6 in overnight trading and then sank over hours back to where it had ended the prior today, before working its way up a bit until the closing bell. I exited early, during the most robust minutes of the fall, for a debit of $4.03, with shares at $93.77, for 14.3% of maximum potential profit.

The earnings announced were at odds with the Zacks earnings surprise predictor (ESP) algorithm that produced a positive score of 0.89 within the context of a bullish rank (2).

Shares rose by 3.% over my holding period of less than a day, or a +1,125% annual rate. The options position produced a 16.6% return for a +6,068% annual rate.

From the pre-earnings close to the post-earnings close, shares showed a net rise of $2.52, well within both the 85% confidence expected move of $6.43 and the profit zone of $4.50.

The trend metrics pointed toward a rising trend, with a positive directional index (+DI) of  37.2, a negative (-DI) of 12.3, and an average directional index (ADX) of 35.5.

The net move for the day was within the ranges of the last four post-earns moves, which averaged $3.30 with a maximum of $4.80 and a central tendency of $4.01.

DG publishes earnings on Thursday before  the opening bell.

I shall use options that trade for the last time nine days hence, on Dec. 15.

Implied volatility stands at 32%, which is 2.9 times the VIX, a measure of the volatility of the S&P 500 index.

DG’s IV stands in the 59th percentile of both its annual range and tits most recent broad movement.

The price used for analysis was $98.98.

I shall use an iron fly structure, maximizing the premium.

Premium: $4.70 Expire OTM
DG-iron fly Strike Odds Delta
Long 100.00 89.9% 11
Break-even 95.70
Short 91.00 52.5% 52
Short 91.00 48.5% 48
Break-even 86.70
Long 82.00 90.5% 8

The premium is 52.2% of the width of the position’s wings.

The risk/reward ratio is 0.9:1.

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 $4.80, and the average was $3.30. After eliminating the maximum and minimum post-earnings movements, the central tendency is $4.01.

The expected move covering 85% of occurrences is $4.59, beyond the profit zone.

The bid/ask spread is 7.4%.

Decision for My Account

Some ambiguities to resolve in entering a position on DG as described above. The earnings surprise predictor (ESP) score from Zacks is positive, but not impressively so. The Elliott wave count of the rise since Nov. 6 suggests that the movement is within its final push up and arguably could well be done with the rise.

Considering those realities, I decided to go with a direction neutral trade that covers all but nine cents of the expected move and nearly covers the maximum post-earns move of the past year.

The stock at the time of entry was priced at $90.97.

By Tim Bovee, Portland, Oregon, Dec. 6, 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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