In Strategic Trader, we closed our original position in DG last week following the company’s earnings report. We wanted to give traders a day or two to settle down on valuations, and we needed time to review upcoming economic data.
At this point, we feel confident about moving back into the trade with a new short put position.
When the company reported last week, it was a surprising performance. The company beat expectations for revenue and earnings by $1.7 billion and $3.12.
We exited the trade because we were concerned about its performance after that surprise. The stock was mostly flat, which is difficult to explain.
One possibility is that investors were thinking back to the old expectations, when analysts thought DG might post a 50% surprise instead of one just over 25% for earnings.
We were also concerned about U.S.-China trade tensions having an effect on the stock, so putting our trade on hold was prudent.
From a fundamental perspective, our worries that the stock might suffer from U.S. tariffs on imported goods were overestimated. The potential risks have been offset by strong consumer demand and a very competitive position in the discount retail sector.
We expect DG to remain defensive if there are any short-term corrections in September.
Consolidation Above $200
DG’s technical picture looks good as well. Although earnings day on Aug. 27 was a little volatile, support is still intact, and the consolidation in the $200 per share range still has a bullish bias for the eventual breakout.
Daily Chart of Dollar General (DG) — Chart Source: TradingView
The only issue we have with DG is that its options are not the most actively traded in the market. As a result, the spread between the bid and ask prices can get a little wide.
If you decide to sell a put write against DG, make sure you use a limit order to split the bid/ask price. We recommend looking at expirations in mid-to-late September to ensure you get plenty of 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.