Dollar General plunged earlier in the week, but the bulls came back in a big way yesterday.
optionMONSTER's Heat Seeker tracking program detected the purchase of some 12,900 January 62.50 calls, most of which priced for $0.95 and $1. There was no open interest at the strike before the trade appeared, which indicates that new money was put to work.
These long calls lock in the price where investors can buy shares in the discount retailer, which gapped lower on Tuesday after a poor quarterly report. Paying less than 1/20th of the share price reduces the amount of capital at risk, while keeping the traders in the game for a possible rally in the long term.
It also stands to generate significant leverage. A 30 percent move to $65 in the stock price, for instance, would yield a profit of some 400 percent in the calls. (See our Education section)
DG rose 3.19 percent to $50.19 yesterday and is trying to find support at its 200-day moving average. Some investors might think that the last report wasn't bad enough to justify the drop because profit matched expectations and sales only missed the consensus estimate by about $10 million. Management also trimmed guidance slightly as customers shift to lower-margin products.
Overall option volume was 7 times greater than average in DG yesterday, according to the Heat Seeker. Calls accounted for a bullish 78 percent of the total.
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