Dollar Tree, Inc. (DLTR), Trending Stock Report

Dollar Tree, Inc. (DLTR) is trending in the news. Social media mentions are up 117% in the last 24 hours after the company announced disappointing earnings. The stock fell 22% after the company lowered its forward-looking guidance.

For the first time since they launched weekly options on DLTR, the implied volatility of those options only fell to 50% after the post-earnings implied volatility crush. If history is our guide, it’s clear that volatility expectations are still very expensive considering DTLR’s behavior after past earnings reports.

You can see in the chart below, which shows the price of DLTR shares and the implied volatility of the 1-month options (the lower green line), there is a cyclical pattern in the expected volatility around earnings reports. After competitor Dollar General (DG) posted bad results, investors pushed DLTR volatility expectations higher than normal before yesterday’s announcement. You can also see that the post-earnings volatility crush has not followed the normal pattern. Volatility expectations remain elevated. That’s good news for option sellers.

This Volatility Term Structure chart for DLTR is showing that shorter terms are relatively more expensive. The September 20^th expiration is not as expensive as the weekly expirations before it. However, the September 20^th expiration has much better liquidity. The improved liquidity gives us a better chance to get filled at the price we want.

This MDM graph compares the modeled expected distribution for future stock prices (the orange line) with the actual distribution of the stock’s prices over the past year (the blue histogram). You can see that the actual stock movement does not match the expected. This graph tells us that the stock does not make large moves as frequently as prices expect. That means options are expensive relative to their history and that is good for option sellers.

DLTR shareholders had a bad day yesterday after earnings were announced. From an options trader’s perspective, options for September 20th expiration remain high relative to DTLR’s past behavior after earnings. This gives option sellers an opportunity.

To get the specific details and prices on today’s trade ideas, be sure to read today’s ODDS Online Daily Option Trade Idea.