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Bulls Bet on Additional Upside for Dollar Tree

Option players are fond of DLTR's October 52.50-strike call in today's session

by 9/20/2012 12:56 PM
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Option volume is accelerated on Dollar Tree, Inc. (NASDAQ:DLTR - 49.02) today, with calls and puts trading at roughly eight times and three times their respective average intraday pace. By the numbers, calls have easily emerged as the options of choice, with more than 6,200 contracts crossing the tape, compared to fewer than 900 puts.

Call players have honed in on the October 52.50 strike, which has seen more than 2,300 contracts change hands. With nearly all of the contracts trading at the ask price, and open interest currently resting at 539, it's safe to assume that a portion of today's volume represents buy-to-open activity. By purchasing these long calls, speculators will begin to profit with each step north of $52.81 (the strike plus the volume-weighted average price of $0.31) DLTR makes through October expiration. This breakeven level represents a 7.7% premium to its current perch.

This bullish bias is reflective of a recent trend that's been emerging in the options pits, per data at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). Over the past 50 sessions, traders have bought to open 1.16 calls for every put on the stock. However, DLTR's 10-day call/put volume ratio has swelled to 5.45. What's more, this shorter-term ratio ranks higher than 95% of similar readings taken in the last year, indicating calls have been picked up over puts at a near annual-high clip in recent weeks.

Additionally, the equity's Schaeffer's put/call open interest ratio (SOIR) of 0.48 not only shows that call open interest more than doubles put open interest among options with a three-month shelf life, but it also ranks in the 20th percentile of its annual range. In other words, short-term speculators are more call-heavy than usual toward DLTR.

This attention from bulls could be a result of the stock's formidable technical backdrop. Since May 2008, DLTR has enjoyed a steady lift higher atop its 10- and 50-week moving averages, and recently pulled back to the latter of these trendlines. What's more, the equity has jumped 4.2% in today's session, adding to its already impressive 23.8% year-over-year advance.

Going forward, DLTR may be positioned for some contrarian tailwinds courtesy of a doubting brokerage bunch. No fewer than seven out of 19 analysts still maintain a "hold" or "strong sell" suggestion toward the stock. Plus, the consensus 12-month price target of $54.08 represents a timid 10% premium to DLTR's current price. Should the security continue its run higher, a capitulation from these skeptics could translate into a fresh wave of buying power for the outperforming equity.

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