Dollar Tree Calls Run Hot During Rebound

A surging retail sector is giving Dollar Tree stock a lift

The shares of Dollar Tree, Inc. (NASDAQ:DLTR) are on the rebound today, on a halo lift from several retail stocks that are surging post-earnings. Today's pop closely follows Dollar Tree's own earnings report on Nov. 25, which caused the stock to lose 15.2% on the day. The equity seems to have found support in the $88-$90 region -- home to its August lows, and year-to-date breakeven level -- and is up 1.5% so far this afternoon to trade at $90.58.

The sector boost has options bulls coming in hot, with 15,000 calls across the tape so far, three times the average intraday pace. There appears to be buy-to-open action happening at the weekly 12/6 90.50-strike call, which expires at the close tomorrow. Positions are being purchased at the weekly 12/13 91-strike call, too, suggesting these bulls expect DG to rally back above $91 by the time these contracts expire next Friday, Dec. 13.

This bullish behavior is nothing new, though. In the last 10 weeks, 1.87 calls have been bought to open for every put on the the International Securities Exchange (ISE), Cboe Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). This preference for long calls is quite unusual though, as this ratio sits in the 93rd percentile of its annual range.

Most analysts remain skeptical of a stock that's down 30% since its mid-October record peak at $119.71. Currently, 11 of 17 brokerages say the discount retailer is a lukewarm "hold." However, the average 12-month price target of $104.48 is a healthy 15% premium to current levels.