Unofficial Trade
Unofficial Trade
Hello Smart Option Sellers! Dollar General (DG) As mentioned yesterday, I was going to be offering up an unofficial earnings play today for those of you who may be interested. Earlier, I had outlined what it would take to make a potentially successful earnings play - the need to find stocks which have a history of large moves after the earnings are announced, and to find undervalued option contracts that were not pricing in those potential large moves . DG is one of those stocks that has a history of large moves during earnings. It doesn't happen every time, but it happens often enough to give the trade a try. How large is large enough? Well, in DG's case, it can easily jump anywhere from $5 to $10 after earnings are announced, and as long as we can find cheap options within that range, it could be worth a stab. Before I get to the recommendation, remember the caveats: 1. These recommendations will all be unofficial trades. So you can't hold me to it! 2. Buying options has a very low probability of winning. You all know my thoughts on that. There's a reason why we stick with selling put options - the win rate is 90% and higher. You don't want to mess with that. So, if you get involved with the buying options game, be prepared for more losses than gains. Since I've always said that earnings are a crapshoot and you never know which way the stock will move, we can play both sides of the coin. How? By buying both a call option and a put option. Currently, DG has been trading between $72 and $73 per share and I don't have a feel for which direction it might trend towards after the earnings are announced. Sometimes I have a gut feeling that a stock will move higher or lower (like Target), but in DG's case, I'm non-committal. So, buying both calls and puts will give you an opportunity to profit no matter which way the stock moves. The only draw-back to using both a call option and a put option is that you have to pay for two trades instead of one. But if you're unsure of the direction and the options are cheap, it will cover you for every scenario. Your worst case situation is if earnings are in line with expectations and the stock goes nowhere. If that happens, you will most likely lose on both the call and put option. My advice: keep it small and don't spend too much money on it. I wouldn't spend more than $.25 - $.30 per option. It won't be as cheap as the Target $.05 put options, but it's as cheap as DG options will get for this occasion. Like I said, you're going to have more losers than winners with this strategy so don't go crazy with it. So, with all that said, here's what you can do: Buy (buy-to-open) both DG March 17, 2017 put options and call options for a combined total buy price in the range of $.50-$.60 per total as an opening transaction (buy-to-open). With DG stock fluctuating between $72 & $73 per share, you should look at strikes within a $5 radius at the time you make the trade. This will entail focusing on the $67, $67.50 & $68 put options and the $72, $72.50 & $73 call options. If you buy both call options and puts options, and the stock has one of its large moves after the earnings are announced, one of those strike prices could become profitable. You can't make money on both. It will be one or the other. Also, if you choose to buy both the call and put option, it is wise to buy them at the same time as a spread trade called a "strangle". This will allow you to pay one total price for both options at the same time instead of manually making two separate trades for each one. Ask your broker for help if needed, but it is very easy to place this spread trade. With the total spread price being in the range of $.50-.$60, it means that each individual option is worth $.25 - $.30 each. In the end, as long as you execute it as a spread, it doesn't really matter what each individual price ends up being. If you have a gut feeling that DG will move higher or lower after earnings, then feel free to only concentrate on buying either just the call option or put option. My advice is to stick to buying both. You are more than welcome to adjust the strike prices to fit your needs and also take note that these are the weekly March 17, 2017 options that expire this Friday (in 2 days). Earnings come out before the open tomorrow (3/16) so we'll know very quickly whether it's going to be profitable or not. I will send an update early tomorrow alerting everyone of follow-up action. Good luck! Let us know if you decide to get in. You can reach us here. That's all for today. Regards, Lee Let's Grab That Cash!
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