How Large Option Traders Are Playing Discount Grocery Stocks As Coronavirus Spreads

Wayne Duggan
4 min read
0
In this article:

Discount grocery retail shares bounced back on Tuesday as aggressive Federal Reserve stimulus measures triggered a slight rebound in the market.

On Monday and Tuesday, large discount retail option trades were mixed in nature, suggesting investors are divided on whether or not the dips in Costco Wholesale Corporation (NASDAQ: COST), Target Corporation (NYSE: TGT) and Dollar Tree, Inc. (NASDAQ: DLTR) are buying opportunities.

The Trades

This week, Benzinga Pro subscribers received five option alerts related to unusually large trades of discount retail options:

  • On Monday at 11:54 a.m., a trader sold 501 Dollar Tree put options with a $80 strike price expiring on March 20 near the bid price at $2.351. The trade represented a $117,785 bullish bet.

  • On Monday at 1:29 p.m., a trader sold 900 Dollar Tree call options with a $90 strike price expiring on Apr. 17 at the bid price of $2.491. The trade represented a $224,190 bearish bet.

  • On Tuesday at 10:11 a.m., a trader bought 500 Costco call options with a $295 strike price expiring on Friday at the ask price of $10. The trade represented a bullish bet worth $500,000.

  • On Tuesday at 11:25 a.m., a trader bought 754 Target put options with a $90 strike price expiring on Apr. 17 near the ask price at $3.50. The trade represented a bearish bet worth $263,900.

  • On Tuesday at 12:11 p.m., a trader bought 510 Costco call options with a $307.5 strike price expiring on Friday near the ask price at $8.50. The trade represented a bullish bet worth $433,500.

See Also: Coronavirus Checklist: What You'll Need To Have At Home In Case Of Quarantine

Why It's Important

Even traders who stick exclusively to stocks often monitor option market activity closely for unusually large trades. Given the relative complexity of the options market, large options traders are typically considered to be more sophisticated than the average stock trader.

Many of these large options traders are wealthy individuals or institutions who may have unique information or theses related to the underlying stock.

Unfortunately, stock traders often use the options market to hedge against their larger stock positions, and there’s no surefire way to determine if an options trade is a standalone position or a hedge. In this case, given the relatively modest sizes of the largest discount retail option trades by institutional standards, they are unlikely to be institutional hedging.

Critical Role In Coronavirus Outbreak

Unlike many of the stores that can close up shop during the COVD-19 outbreak, these discount grocery stores are critical in making sure people have food, water and housing supplies during the crisis. The good news for these discount retailers is that they have historically performed relatively well during economic downturns.

From the beginning of 2008 to the beginning of 2010, the S&P 500 was down 24% overall, but Costco and Target shares were down just 15.1% and 3.2%, respectively. Dollar Tree shares were up 86.3% during that two-year stretch.

On Monday, Dollar Tree announced it would be opening its locations one hour earlier than usual only for elderly shoppers most at risk from the virus.

Here’s a breakdown of the percentage of StockTwits messages mentioning each of the three discount grocery stocks that were bullish in nature on Tuesday:

  • Costco: 58 % bullish.

  • Dollar General: 54.5% bullish.

  • Target: 75% bullish.

DLTR Chart by TradingView new TradingView.widget( { "width": 680, "height": 423, "symbol": "NASDAQ:DLTR", "interval": "D", "timezone": "Etc/UTC", "theme": "light", "style": "1", "locale": "en", "toolbar_bg": "#f1f3f6", "enable_publishing": false, "allow_symbol_change": true, "container_id": "tradingview_ddfef" } ); Benzinga’s Take

This time around, Costco has been the contrarian coronavirus play among the three discount grocery stocks mentioned. Costco shares are up 3.4% year-to-date in 2020, while Dollar General and Target have traded roughly in-line with the S&P 500.

Do you agree with this take? Email feedback@benzinga.com with your thoughts.

See more from Benzinga

© 2020 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.

Advertisement

Recommended Stories