Dollar General Corp. (DG) has quite a few balls up in the air at the moment. Not only is the company pursuing a hostile takeover of rival Family Dollar Stores, Inc. (FDO), but DG stock holders are bracing themselves for the holiday shopping season and Dollar General’s third-quarter earnings release.

Unfortunately, Family Dollar is favoring a lower bid from Dollar Tree, Inc. (DLTR) and overall Black Friday sales arrived 11% below year-ago levels. Will Dollar General’s earnings report follow suit?

For the record, Dollar General earnings are expected to come to 80 cents per share for the third quarter, with revenue seen rising 8.5% over last year to $4.76 billion. DG has done little to inspire confidence in growth on the earnings front, missing Wall Street’s estimates once and matching twice during the past four quarters.

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Despite the mediocre performance, the brokerage community remains quite bullish. According to Thomson/First Call, 18 of the 26 analysts following DG stock rate the shares a “buy” or better. That said, the 12-month consensus price target arrives at $73, just 10% above DG’s current perch. If earnings fail to impress, we could see a few ratings downgrades to bring expectations more in-line with price-target forecasts.

Options activity is a mixed bag for DG stock. In the front two months (December/January 2015), DG has attracted call open interest of 162,117 contracts, versus put open interest of 78,839. The result is a bullishly slanted put/call open interest ratio of 0.48, with calls more than doubling their put counterparts.

Narrowing our focus to the weekly Dec. 5 series of options (i.e. those options most affected by this week’s earnings report), we find a considerably bearish tone among short-term traders. Specifically, the weekly Dec. 5 put/call open interest ratio of 1.72 reveals that puts nearly double calls — a near reversal of the broader front-two-month ratio.

In other words, short-term traders are looking for a decline in DG stock, but may be hedging their bets for a recovery once third-quarter numbers are digested.

Click to Enlarge Heading into tomorrow’s quarterly report, weekly Dec. 5 implieds are pricing in a post-earnings move of about 6.5% for DG stock. This places the upper bound near $70.28, while the lower bound lies at $61.72.

Technically, a rally would push DG stock to fresh all-time highs above $70, while a decline could send the stock below key support at its 50-day moving average and the $62 level.

Options Trade on DG Stock

Dollar General has been quite volatile over the past several months, and entering a position ahead of earnings is not for the light of heart. That said, with the shares trading near overbought levels, weak holiday sales data out and a hostile takeover in the works, DG looks vulnerable to a potential post-earnings selloff.

Those traders looking to join the short-term bearish crowd on DG might want to consider a Jan 2015 $62.50/$65 bear put spread.

At last check, this spread was offered at $1.18, or $1.18 per pair of contracts. Breakeven lies at $63.82, while a maximum profit of $1.32, or $132 per pair of contracts, is possible if DG stock closes at or below $62.50 when Jan 2015 options expire.

As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.