After years of miscues and misfortune, circumstances are finally brightening for discount retailer Dollar Tree (DLTR). The business is now effectively unshackled, thanks to the company’s decision to divest struggling Family Dollar for just over $1 billion. Adding to the enthusiasm for DLTR stock, CFO Stewart Glendinning recently purchased a significant number of shares.
Glendinning acquired 17,000 shares valued at almost $1.24 million. It’s not every day that an executive drops more than a million into the enterprise they run, adding an exclamation mark to the transaction. On a broader level, the interpretation is straightforward. People sell securities for a variety of reasons, many of them mundane. When they buy, it’s for one reason — they believe the position will rise in value.
Still, there’s criticism that Dollar Tree’s turnaround effort and Glendinning’s insider buy represent yesterday’s news. The market is forward-looking, while DLTR stock has already gained almost 23% in the past thirty days. A reversion to the mean is a very tangible possibility.
At the same time, unusual options activity — particularly the character of recent transactions — implies that this rally may still have some legs left. Therefore, I am bullish on DLTR stock.
Unusual Options Activity Points to Sustained DLTR Momentum
Whether you trade options or not, it’s essential to consider the action in this arena. Why? Simply put, it’s a market within the market, a sort of speakeasy for sophisticated market participants. Options traders give away their intentions by taking leveraged wagers on what might happen, while counterparties underwrite the risk that it won’t happen.
That’s the beauty of TipRanks’ Unusual Options Activity screener: the data readout delivers the important transactions and ignores the ones that aren’t.
Following the close of the April 17 session, a swarm of call options swept through the derivatives market, covering several options chains throughout this month and next. Most notably, thousands of calls were purchased for the April 25 expiration date and several hundred for May 23. Strike prices ranged from $80 to $85.
To use the lexicon, these calls are out of the money (OTM), meaning they have no intrinsic value (since there’s no point in exercising the right to buy an $80 call if the security in the open market is $79). Instead, these calls at the time of writing have extrinsic or time value only. Therefore, the speculation is that before expiration, the underlying security will rise above the strike price plus the premium paid for the option.
In other words, the target isn’t just $80 or $85. Instead, there’s a premium attached to every option purchased. For the $80 call expiring this Friday to break even, DLTR stock must hit $81.80, with $1.80 being the premium.
It goes without saying that Wall Street traders aren’t in the business of merely breaking even. So, the actual upside target may be significantly above the strike price.
Finally, it’s worth bringing up an obvious point. A “bullish” transaction involving call options logically implies that the trade is a debit-based contract. In other words, the trader pays a debit hoping that a specific outcome materializes. Subsequently, that outcome must eventually materialize for the trade to be profitable. With so many OTM debit calls purchased by major investors, the interpretation appears unambiguously bullish.
A Pair of Bold Dollar Tree Bets
Currently, DLTR stock is riding a trailing five-day performance of almost 11% up. Such momentum is rare for Dollar Tree. Going back to January 2019, DLTR has only seen four occurrences where it gained between 10% and 20% in one week. Further, the probability of upside fluctuates from week to week.
Assuming this dynamism continues to play out again over the next two months, traders may consider two strategies. First, the 79/80 bull call spread expiring this Friday offers speculators a chance to bite on the obvious apple. The optimists are aiming for the $80 level, a nice round number offering a clean target.
Interested traders may buy the $79 call (at a time-of-writing ask of $239) and simultaneously sell the $80 call (at a bid of $175), resulting in a net debit paid of $64. Should DLTR stock rise through the $80 short strike price at expiration, the maximum reward is $36, or a payout of over 56%.
Another high-risk, high-reward idea is considering the 80/84 bull spread for the options chain expiring May 23. This ambitious trade assumes that the $80 level will soon belong to the bulls and that the excitement will carry the security to greater heights. Should DLTR stock rise through the short strike at expiration, the payout stands at nearly 113%.
Is DLTR a Strong Buy?
Turning to Wall Street, DLTR stock has a Moderate Buy consensus rating based on six Buys, 12 Holds, and one Sell rating over the past three months. The average DLTR price target is $81.22, implying 3% upside potential over the next twelve months.
DLTR Stock May Still Trade at a Relative Discount
Following a long period of mediocrity, Dollar Tree’s turnaround appears to have serious teeth. Thanks to major business decisions such as the Family Dollar divestiture and the CFO’s big insider buy, circumstances appear incredibly bright for DLTR stock. Still, these events are old news, baked into the current share price.
That’s where the options market is so intriguing. With heavy hitters buying OTM call options, the implication is that sizeable further upside remains. If so, opportunistic short-term traders still have a window to capitalize on DLTR stock.