This week we are jumping right back into a position in Dollar Tree (DLTR), which is a stock we traded successfully last month.

Cabot Profit Booster Issue: July 19, 2022

Market Overview
Before we dive into the market and today’s covered call idea, I wanted to update you on our JD and EQT positions.

Last month we bought JD stock at 65.20, and sold the July 66 for $2.96. This call sale dropped our cost basis to 62.24. On Friday of last week, the call that we sold expired worthless.

Yesterday, against our stock position we sold the August 65 for $3.50 which now drops our cost basis to 58.74.

Somewhat similarly, two months ago we bought EQT stock at 42.50, and sold the June 42 call for $4.10, which dropped our cost basis to 38.40. When that call expired worthless, we then sold the July 38 call for $1.45, which in turn lowered our cost basis to 36.95.

On Friday that EQT July 38 call expired worthless, and because of that, yesterday we sold the August 40 call for $2.25, which drops our cost basis to 34.70.

Of note, despite these sales yesterday, we are sticking to Mike Cintolo’s original stop levels for these trades.

Moving on …

Despite the indexes finishing the week lower, the bulls have some hope coming out of last week, as the news couldn’t have been worse and yet the leading indexes lost very little ground.
For the week the S&P 500 lost 1%, the Dow fell marginally, and the Nasdaq lost 1.5%.

And while the indexes fell late in the afternoon Monday, triggered potentially by a negative headline surrounding Apple (AAPL), for the time being I continue to be cautiously optimistic on the market.

This week we are jumping right back into a position in Dollar Tree (DLTR), which is a stock we traded successfully last month.

The Stock – Dollar Tree (DLTR)
Why the Strength
Inflation just hit a 40-year high in the U.S., which largely explains why deep discount retailers like Dollar Tree are outperforming.

The retailer operates around 16,000 locations nationwide and also owns the Family Dollar brand where most items are priced under $10. Most of Dollar Tree’s offerings, by contrast, typically sell for around $1.25, and while this represents a 25% increase from its previous price average, it still represents a major bargain compared to most of its competitors, which is a reason for its buoyant financial performance.

In a tough first quarter which saw bigger retail chains miss earnings estimates and report low single-digit comp sales, Dollar Tree beat top- and bottom-line estimates and delivered its best performance in company history. The firm saw revenue increase 7% while same-store sales surged 11% from a year ago—the best quarterly comp performance in 20 years!—which is proof the company is attracting tons of business from savings-conscious consumers.

Further, as shoppers look for ways to blunt the impact of higher fuel prices, they have an incentive to avoid higher-end retailers that are usually located miles away and keep shopping at Dollar Tree (especially as the company has strategically located many of its stores within easy walking distance of densely developed neighborhoods).

To be fair, the $1.25 price point isn’t sacrosanct; the firm has hiked prices on select items to the $3 to $5 range due to inflation and higher costs, but management reports customers are “responding favorably” to it so far while buying more of the new “greater value” products hitting Dollar Tree’s shelves. Looking ahead, analysts see 7% sales and 30% EPS growth in fiscal Q2, part of a 41% earnings boom likely this year.

Technical Analysis
DLTR’s romp higher late last year led to a three-month-plus consolidation, which then launched the stock on another run up to 177. A sector-wide retail crash followed in May (think Target and Walmart), which caused shares to plummet to 125, although earnings came to the rescue, leading to an unusual (but bullish) chart, with shares quickly jumping back to the pre-retail-crash level. Shares rested a bit longer, but July has been kind to DLTR, with shares perking up (on low volume) as the market has stabilized. Stop — 153

The Covered Call Trade
Buy Dollar Tree (DLTR) Stock at 170, Sell to Open August 170 Strike Calls (exp. 8/19) for $6.50, or a Net Price of 163.5 or less

Static Return: $650 per covered call (3.97%)

Breakeven: 163.5

Covered Call Return (if assigned): $650 per covered call (3.97%)

Please note, the stock and options prices will be moving throughout the day, so these prices are simply an approximation of prices that you should be able to achieve.

However, the important component of this equation is that the stock price paid, minus the premium received via the call sale, equals the Net Price, or 163.5 or less. (In this case 170 minus 6.50 = 163.50. Or another example is you could pay 169.50 for the stock and sell the call for 6, which also equals 163.5)

For every 100 shares of stock you buy, you can sell 1 call. For every 200 shares of stock you buy, you can sell 2 calls. And so on …

Open Positions
If our stop is hit, I will send an alert giving detailed instructions on how to exit the trade. But don’t get too worried about setting the stop. I will manage that for you.

The next Cabot Profit Booster issue will be published on July 26, 2022.

Analyst Bio

Jacob Mintz

Jacob Mintz is a professional options trader and editor of Cabot Options Trader. Using his proprietary options scans, Jacob creates and manages positions in equities based on unusual option activity and risk/reward.

Jacob developed his proprietary system during his years as an options market maker on the floor of the Chicago Board of Options Exchange, where he ran several trading crowds for nearly 10 years.

After a successful career on the trading floor Jacob was tasked with setting up a trading desk at a top-tier options trading company, trading against the most sophisticated hedge funds and institutions in the world.

Today Jacob trades for himself, coaches and teaches about options trading, and runs our Cabot Options Trader, Cabot Options Trader Pro and Cabot Profit Booster advisories. Jacob lives in North Carolina with his wife and two kids who keep him very busy with their sports and social calendars.