2 Rallying Retail Stocks With Bargain-Bin Options

DLTR and DG stocks are flirting with all-time highs

Jan 17, 2018 at 10:26 AM
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Discount retailers Dollar Tree, Inc. (NASDAQ:DLTR) and Dollar General Corp. (NYSE:DG) earned some analyst love today, after Oppenheimer initiated coverage with "outperform" ratings. The brokerage attributed the bullish notes to attractive growth prospects for the retailers over the long term, initiating price targets of $130 and $112, respectively, for DLTR and DG stocks -- in uncharted territory. As such, both equities are flirting with record highs -- and sending up "buy" signals for short-term options traders.

DLTR Options Sending Up Rare Signal

Dollar Tree stock was last seen 1.1% higher at $114.04, and yesterday touched an all-time best of $115.89. The security has been on a tear since trading south of $70 in July, and has skyrocketed more than 60% in the past six months.

Nevertheless, DLTR's short-term options remain attractively priced. The stock's Schaeffer's Volatility Index (SVI) of 22.8% is higher than just 9.8% of all other readings from the past year, pointing to relatively muted volatility expectations being priced into near-term DLTR options. In addition, the stock has handily exceeded options traders' volatility expectations in the past year, as evidenced by DLTR's Schaeffer's Volatility Scorecard (SVS) of 98.

What's more, since 2008, there have been just two other times that Dollar Tree stock was within 2% of a record high while simultaneously sporting an SVI in the bottom 10% of its annual range. After both of those signals, DLTR was higher a month later, averaging a healthy gain of 4.34%, according to data from Schaeffer's Senior Quantitative Analyst Rocky White. A similar surge would place the shares even deeper into uncharted territory.

DG Stock Flirts With $100

Dollar General stock is trading 1.2% higher at $99.64, and earlier peaked at $99.69 -- a penny shy of yesterday's record peak of $99.70. The shares are set for a fifth straight weekly win, and have surged more than 43% in the past nine months.

Still, Wall Street remains skeptical of DG stock, which boasts just nine "buy" or better analyst endorsements, compared to nine "hold" or worse opinions. Another round of upbeat brokerage notes could help propel the shares north of the century mark.

In addition, the stock's Schaeffer's put/call open interest ratio (SOIR) of 1.11 is in the 96th percentile of its annual range, implying that short-term options traders have rarely been more put-biased during the past year. An unwinding of pessimism in the options pits could also be a tailwind for DG shares.

Speaking of Dollar General options, now is an opportune time for short-term premium buyers to strike. The equity's SVI of 22% is in the 11th percentile of its annual range, pointing to relatively attractive near-term options prices.

 


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