Dollar Tree Set to Soar when the Market Goes South

It’s the start of another beautiful week to trade stock options and I am excited about the possibilities that this week holds. I am especially excited about trading options of Dollar Tree, Inc. (NASDAQ:DLTR), an $11.61B company that operates thousands of discount variety stores offering merchandise at the fixed price of $1. As at 12:01PM EDT, shares of Dollar Tree are trading up 8.8% to somewhere above $59 per share.

Why Shares of Dollar Tree Soared Today

Shares of Dollar Tree are trading up nicely today on news that it would acquire Family Dollar Stores Inc. for $8.5B to create the biggest discount retailer in North America. It might interest you to know that shares of Family Dollar has seen a lot of pressure lately as activist investors, Carl Icahn and Nelson Peltz have been pushing for its sale. Dollar Tree offer products that sell for $1 or less while Family Dollar also sells many items that cost $1 or less while stocking other goods with a range of prices

Upside Potential Ahead

The acquisition of Family Dollar by Dollar Tree holds great potential for Dollar tree going forward.  Quoting Bob Sasser, CEO at Dollar Tree “this acquisition will extend our reach to lower-income customers and strengthen and diversify our store footprint.”  I posit that the acquisition will make the new company bigger and transformed towards targeting different classes of customers in the retail industry.

Dollar Tree Chart

The stock chart above shows how share of Dollar Tree traded in the year to date period. You will observe that the stock has been susceptible to lots of wild swings starting from January when the stock fell from a $56 open to as low as $49 in February. The pattern of swinging wildly upwards and downwards had continued for practically all of this year until the news of the acquisition sent the stock above its year-to-date high today.

I am optimistic about the upside potential in shares of Dollar Tree as a new uptrend kicks off on the stock based on recent event in the news. More interesting is the RSI of 60.11, which shows that the buying action is just starting out on the stock.

An Anchor that Olds When the Economy Goes South

DLTR vs SPX

The chart above shows how shares of Dollar Tree have traded in comparison to the S&P 500 in the last 10 years during which the economy has gone on a recession. If you pay special attention to the section of the chart that shows the recession, you will observe that shares of Dollar Stores actually traded up significantly when the general market was trading down. More interesting is the fact that the Dollar Store has outperformed the S&P 500 over the last 10 years.

It is no longer news that we are at the peak of a maturing bull market and it would be smart to own a defensive play in your portfolio in case the economy goes south. I am not being pessimistic about the direction of the economy but a defensive move is a smart move under the current situation.

How to Trade DLTR Options

I am optimistic about the potentials inherent in options of Dollar Tree when the economy goes down south. I strongly believe that a $60 price target is reasonable in the next 6 months and I recommend the DLTR Jan 2015 57.500 call (DLTR150117C00057500) at the current $2.71 asking.

— Daily Option Alerts

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