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A Dollar Tree Spread at Half the Price

Option trade pays if retailer remains above $55


One of this week’s Market Taker Edge trades for options trading investors is a put credit spread in Dollar Tree Stores Inc. (NASDAQ: DLTR). This credit spread sets up in terms of both its price chart and its options volatility.

Dollar Tree operates thousands of discount variety stores and competes with the likes of Wal-Mart (NYSE: WMT), Dollar General (NYSE: DG), and Family Dollar Stores (NYSE: FDO). It closed Friday at $57.15, near its 52-week high of $57.99.

The trade: Sell the DLTR May 52.5 – May 55 Put Spread at $0.45 or better. This trade is executed by buying the May 52.5 puts and at the same time selling the May 55 puts. The objective is for DLTR to remain above $55 a share through Friday, May 20 expiration.

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With the current uptrend, this is a high probability trade. Earnings look to be released just before expiration, so traders can keep this trade until close to that date and close it just before earnings. The real edge on this trade is garnered from the overpriced options in terms of implied volatility. All in all, this is a nice, statistically favorable set up.

Dan Passarelli of writes the Market Taker Edge options newsletter. Dan has more than 17 years’ experience in the options industry as a market maker, Options Institute instructor and author of “Trading Option Greeks.”

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