November 27, 2019  Terry’s Tips Trade Alert #3 – Earnings Eagle  Portfolio   

  

Dollar General (DG) announces earnings before the open on Thursday, December 6.  The options are pricing in a 6.3% move while the recent average move has been 7.1%.  While these numbers don’t appear to give us a statistical edge, we have uncovered a measure which seems to be a better measure of how profitable the spreads might be.  That measure is to calculate the at-the-money calendar cost with the short side in the series after the announcement (if calculated in the week before the announcement) and the long side the furthest-out weekly series.  Compare that number with the absolute value of the at-the-money short extrinsic option value.  If that number is at least 3 times the cost of the calendar spread, the odds are good that it will be a profitable play.  In this DG play, with DG trading about $158, the at-the-money spread is at the 157.5 strike and we would compare the cost of the first spread (1.50) with the extrinsic value of the 10Jan20 157.5 put ($4.50) which yields 3.

 

BTO 4 DG 10Jan20 157.5 put (DG200110P157.5)

STO 4 DG 6Dec19 157.5 put (DG191206P157.5) for a debit of $1.50  (buying a calendar)

 

BTO 4 DG 21Feb20 150 put (DG200221P150)

STO 4 DG 6Dec19 150 put (DG191206P150) for a debit of $ 2.35 (buying a calendar)

 

BTO 4 DG 21Feb20 155 put (DG200221P155)

STO 4 DG 6Dec19 155 put (DG191206P155) for a debit of $2.55  (buying a calendar)

 

BTO 4 DG 21Feb20 160 call (DG200221C160)

STO 4 DG 6Dec19 160 call (DG191206C160) for a debit of $2.90  (buying a calendar)

 

BTO 4 DG 21Feb20 165 call (DG200221C165)

STO 4 DG 6Dec19 165 call (DG191206C165) for a debit of $2.60  (buying a calendar)

 

BTO 4 DG 21Feb20 170 call (DG200221C170)

STO 4 DG 6Dec19 170 call (DG191206C170) for a debit of $2.08  (buying a calendar)

 

Be prepared to change this (these) price limit(s) by $.05 or more in order to get an execution

 

Happy trading.

Terry