The overall retail sales data released on Friday was right in the middle of the “Goldilocks zone” we were hoping for. Not so good that investors would worry about the Federal Reserve pulling support, but not so bad that investors get more concerned about the economy worsening.
On the back of that economic release, we think traders could stand to increase their exposure to retail by selling a new put write on Dollar General (NYSE:DG).
Discount retail companies start reporting earnings this week and we are expecting positive surprises in general.
Walmart, Inc.’s (NYSE:WMT) report this morning is a good example of what we’re talking about. The results from the retail giant were staggering, and more reports like that from discount retailers will help DG sustain its current breakout.
Retails Sales and Earnings Triumphs
The case for DG is mostly in looking at its sector at large, though the company itself also looks ready to outperform on earnings.
The Census Bureau reported that core retail sales grew by 1.9% on a month-over-month basis. This doesn’t do anything to eat into the deficit from the second quarter, which is the bad news, but it is slightly above expectations, which is just what we wanted to see.
Timing the trade for this month helps us take advantage of very inflated premiums. Discount retailers are usually more popular during economic downturns, and while DG doesn’t have the e-commerce infrastructure that let WMT post strong numbers this quarter, we’re not sure that matters.
DG will be reporting its earnings later this month, and the company has beaten expectations in its past two reports. As we described in our recommendation last year, DG is an alternative to WMT. While WMT beat earnings this quarter by investing in e-commerce — thus boosting e-commerce sales by 97% — DG still provides competitive prices in stores.
Solid Support Shows No Signs of Giving Way
From a technical perspective, $190 is a solid support level where the stock consolidated for more than two months. We expect traders to be anchored to that price level if there is more market volatility than we expect.
Daily Chart of Dollar General Corporation (DG) — Chart Source: TradingView
The retail report from Friday wasn’t great, but it was good enough to warrant a cautiously bullish stance on DG. Average premiums are still relatively elevated across its sector, which will amplify our income from the trade, and the company’s upcoming earnings report means traders have even more volatility to capitalize on.
With its strong technical formation and earnings track record, DG is a great target for a bullish put write.
The $190 level will make an excellent strike price, and by picking an expiration after DG reports earnings later this month, traders can collect even more premium from this position.
InvestorPlace advisers John Jagerson and S. Wade Hansen, both Chartered Market Technician (CMT) designees, are co-founders of LearningMarkets.com, as well as the co-editors of Strategic Trader.