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2 Strategies To Trade Thursday's Dollar General Earnings Report Using Options

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2 Strategies To Trade Thursday's Dollar General Earnings Report Using Options

Dollar General (NYSE: DG) is due to report earnings for the September quarter on Thursday before the opening bell. The stock is up 40% this year and is trading near its all-time high. 

Here are the consensus Wall Street estimates for Thursday:

  • Earnings Per Share: $1.97
  • Revenue: $8.12 billion

How DG Historically Moves Before, During, And After Earnings

More often than not, Dollar General closes higher on the day before an earnings report. The average return for DG on such days over the last 12 quarters is 0.3%, though the stock moves an average of 1.5% in either direction. 

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Source: Market Chameleon

On the day of earnings, DG trades down an average of 0.9% (the avg return field below) and is more than likely to trade down than up. 

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Source: Market Chameleon

However, DG tends to trade higher in the days and weeks after a report. The stock’s best performance is in the first three days after earnings, during which it returns an average of 2.7%.

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Source: Market Chameleon

So, what kind of options trade should you make in DG into Thursday’s report? 

If You Are Bullish

For bullish DG traders, you may want to consider the Long Call strategy. 

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Source: Market Chameleon

This strategy involves holding the position until its Dec. 4 expiration. The long call will profit if the stock rises above whatever the cost of the option was plus the strike price. As a call buyer, you risk losing the cost of the option purchase. 

In the case of the trade outlined above, the payout diagram is as follows:

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Source: Market Chameleon

Note that the call will profit at expiration if the stock price closes above $229.70, which is 4.4% away from the spot price.

The maximum loss that can be incurred will happen if DG is below $227.50 at expiration. At that point, the strategy will lose $220 per contract. 

According to Market Chameleon, buying a call option at the 227.5 strike that expires on Dec. 4 would result in a 38% theoretical edge over typical market conditions. 

If You Are Neutral

For traders who want to profit if DG makes a big move in either direction, a Debit Iron Condor is appropriate. 

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Source: Market Chameleon

This trade is a way to take advantage of implied volatility by buying a put, selling a put below it, buying a call, and selling a call above it. Below is a payout diagram of the call option described above at expiration.

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Source: Market Chameleon

In this case, the trade will profit if DG closes at or below $200 or at or above $240 at expiration. The maximum gain is $890, while the maximum loss is capped at $360, and will only happen if the stock closes between $212.50-$227.50 at expiration. 

According to Market Chameleon, putting on a debit iron condor for Dec. 4 expiration at the specific strike prices outlined above would result in a 37% theoretical edge over typical market conditions. 

 

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Posted-In: Market ChameleonEarnings News Previews Options Markets Trading Ideas