Big upside play in Family Dollar

optionMONSTER

One trader apparently believes that Family Dollar will keep making new highs.

optionMONSTER's Heat Seeker monitoring program detected the purchase of 15,000 January 82.50 calls for $2.20 and the sale of an equal number of January 65 puts for $1.70. Volume was more than 17 times open interest at both strikes, indicating that new positions were implemented.

The long calls lock in a potential $82.50 purchase price for the discount retailer's stock, while selling puts generates income but creates an obligation to get long at lower prices if shares fall below $65. Combining the two trades is bullish and similar to owning shares, though it costs much less.

Friday's transaction, for instance, cost $750,000 but will behave similarly to owning about 720,000 shares. Using pure stock would have required an outlay of roughly $53 million.

The position will also increase its leverage if FDO rallies, turning into 1.5 million shares if it goes over $82.50. But investors also stand to lose money to the downside because of the short puts. (See our Education section for more on how options can be used to manage trades.)

FDO fell 1.82 percent to $73.34, one day after hitting an all-time high above $75. It's been benefiting from a shift back to discount retailers in recent months while specialized apparel stores struggle. The last earnings report in July also beat expectations and guidance was above consensus.

The shares peaked around $65 in May, which could make some chart watchers think it will hold that level in the event of a drop.

Total option volume was 13 times greater than average in the session, with that bullish trade accounting for almost all the activity.

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