Why One Trader Rejected a Dollar Tree Options Trade

Our traders are stalking a lot of different stocks throughout the week, but not every potential trade idea develops into a formal recommendation to our subscribers. Whether it's the break of a key technical level for the shares, an unexpected news announcement, or an unfavorable options pricing environment, this regular feature will shed some light on the factors we view as "deal breakers" to otherwise intriguing trade setups. Today, Schaeffer's Senior V.P. of Research Todd Salamone chimed in on one stock he was recently toying with -- but ultimately rejected -- for a long put position in Schaeffer's Weekend Trader series: Dollar Tree stock.

What He Liked About DLTR Puts

Specifically, DLTR caught Salamone's eye because:

1. DLTR stock was below its year-to-date breakeven level, in an area that has been support multiple times. A long put position would be a bet this level breaks -- and breaks hard.
2. Dollar Tree recently reported earnings, and the stock has made very significant moves between earnings over the past couple of reports.
3. There's heavy call open interest at the overhead April 77.50 strike, with more than 27,000 contracts outstanding.
4. Short interest has been cut in half over the past year, but that hasn't helped DLTR. Short interest is now at a 52-week low.
5. Analysts are bullish, with 10 out of 20 offering up "strong buy" recommendations. Plus, the stock's average 12-month price target of $89.43 was nearly 20% above DLTR's price.
6. The stock's Schaeffer's Volatility Index (SVI) of 24% is in just the 16th percentile of its annual range, hinting at attractive short-term premiums, from a historical volatility standpoint.

Why He Backed Out of a DLTR Trade

However, Salamone ultimately chose not to recommend DLTR puts right now, mostly because of potential support. The stock was down near the $75 level, which has been tested multiple times, and is just above the 2016 low. Further, $75 is double the 2013 low, which occurred after about a 35% decline that began in mid-2012 and ran to the late 2012-early 2013 lows.

Plus, "The 12-unit moving average has been solid on pullbacks," he noted. "I would hate to buy puts here and have this mark another low." However, "one difference in the pattern is DLTR has touched this trendline twice in the past two months, whereas in prior months it was more of a 'touch and immediate go.'" At last check, DLTR shares are bucking the broad-market trend lower, up 2% at $76.43.

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