Underperforming Discount Retailer for Options Bears

DG is flashing a bear flag on the weekly chart

Jul 18, 2023 at 2:55 PM
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Subscribers to Schaeffer's Weekend Trader options recommendation service received this DG commentary on Sunday night, along with a detailed options trade recommendation -- including complete entry and exit parameters. Learn more about why Weekend Trader is one of our most popular options trading services.

Dollar General Corp (NYSE:DG) recently stalled at the $166-$168 area, which is eight times its initial public offering (IPO) price, and 1.1 times its June closing low. Plus, the consolidation into its 30-day moving average resolved to the downside last week. The shares have been struggling since their steep post-earnings bear gap in early June, and are flashing a bear flag on the weekly chart. With this technical pressure in place, now looks like a good time to weigh in with puts.

DG July18

Analysts could be in the midst of a downgrade cycle as well, as 20 of the 31 in coverage sported “buy” or better ratings three months ago, with 16 of the 31 carrying a bullish rating now.

There is potential for the stock to drop as far as $140, which is its 2020 monthly closing low. Analysts are pricing in low volatility expectations as well, as DG’s Schaeffer’s Volatility Index (SVI) of 22% ranks in the 15th percentile of its annual range.

Our recommended put option has a leverage ratio of 7.6, and will double on an 11.3% drop in the underlying shares.

 

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