This week we are adding a covered call in yet another earnings season winner that has emerged amidst the rubble of the retail sector.

Cabot Profit Booster Issue: June 1, 2022

Market Overview
While it may be counterintuitive, the bad economic data last week may have been just what the stock market bulls were looking for, as the disappointing numbers caused traders to price in less aggressive interest rate hike expectations for the remainder of the year, which had weighed on the market for months.

For the week, the S&P 500 gained 6.6%, its best week since November 2020; the Dow rallied 6.25% and the Nasdaq rose 6.85%.

This week we are adding a covered call in yet another earnings season winner that has emerged amidst the rubble of the retail sector.

The Stock – Dollar Tree (DLTR)
Why the Strength
Rampant inflation is pushing more budget-stretched consumers to do their shopping at deep-discount stores like Dollar Tree.

The company, which operates around 16,000 outlets nationwide, also owns the Family Dollar brand where most items are priced under $10. But Dollar Tree’s attraction is that most of its retail offerings typically sell for around $1.25 (up somewhat in recent years), and those bargains are hard to pass up as gas and food prices soar. What’s more, for customers who want to save on gas (or simply don’t want to leave the house), both stores offer one-hour delivery through a partnership with Instacart.

Dollar Tree produced jaw-dropping earnings beats in Q1 that compared favorably with results from bigger discount rivals. Revenue of $6.9 billion increased 7% from a year ago and per-share earnings of $2.37 were 37 cents above estimates. While Family Dollar’s same-store sales were 3% lower, comp-store sales for Dollar Tree leaped 11% as customers clearly went for the better bargains.

During the quarter, the company opened 112 new stores and expanded or relocated 33 stores with the result being a 3% increase in selling square footage. Although most items at Dollar Tree are still at the $1.25 price point, the company said it’s experimenting with higher-priced offerings (in the $3 to $5 range) with “strong consumer response” to date.

Going forward, the company guided for revenue of ~$6.7 billion in Q2 and EPS of ~$1.50, and for the full year sees comp-store sales rising in the mid-single digits in the Dollar Tree segment and being flat for Family Dollar. Both forecasts are likely to surprise Wall Street’s far more conservative estimates, however, as the bargain hunting trend gains traction amid inflation’s persistence—analysts see earnings up 40% this year and another double digits in 2023.

Technical Analysis
DLTR raced to new all-time highs in November as investors looked ahead to accelerating growth; after resting for a few weeks, the stock rallied further before hitting a peak of 177 in April. Then came the sector-wide retail crash in May, which came out of left field and caused DLTR to crater to 125—but earnings saved the day last week, with shares immediately recouping the Target-related drop and then some. We’re OK grabbing a few shares in this area. Stop - 139

The Covered Call Trade
Buy Dollar Tree (DLTR) Stock at 162, Sell to Open June 160 Strike Calls (exp. 6/17) for $5, or a Net Price of 157 or less

Static Return: $300 per covered call (1.91%)

Breakeven: 157

Covered Call Return (if assigned): $300 per covered call (1.91%)

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 157 less. (In this case 162 minus 5 = 157. Or another example is you could pay 161.5 for the stock and sell the call for 4.50, which also equals 157)

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 June 7, 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.