Family Dollar (NYSE: FDO - option chain) shares are rising today after the company posted a fourth-quarter profit of $53.2 million, or 38 cents per share, beating analysts' estimates of 34 cents per share. Discount stores have been one of two industries that have posted gains in the past year, alongside the typically defensive household goods industry. Today's earnings reinforce the idea that these companies are strong bets in weak economic times. If you think that the stock won't fall by too much in the coming months, then now could be a good time to look at a bullish hedged trade on FDO.FDO opened this morning at $25.35. So far today the stock has hit a low of $25.23 and a high of $26.05. As of 12:25, FDO is trading at $25.18, up $1.19 (4.9%). The chart for FDO looks neutral and S&P gives FDO a 3 STARS (out of 5) hold ranking.
For a bullish hedged play on this stock, I would consider a January bull-put credit spread below the $17.50 range. A bull-put credit spread is an options position that combines the purchase and sale of put options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make an 8.7% return in just three and a half months as long as FDO is above $17.50 at January expiration. Family Dollar would have to fall by more than 30% before we would start to lose money. Learn more about this type of trade here.
FDO hasn't been below $17.50 since January and has shown support around $23.50 recently.
Brent Archer is an options analyst and writer at Investors Observer.
DISCLOSURE: Mr. Archer owns and/or controls diversified portfolios of long and short stock and option positions that may include holdings in companies he writes about. At publication time, Brent neither owns nor controls positions in FDO.
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Reader Comments (Page 1 of 1)
10-31-2008 @ 7:27PM
Jorge said...
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