Tuesday, March 8, 2011

Trade of the Day: Big Lots July $42.5/$45/$47.5 call tree

The Trade
A trader bought 5,000 July $42.5 calls at $2.90, sold 5,000 July $45 calls at $1.85, and sold 5,000 July $47.5 calls at $1 for a net debit of $0.05 or $25,000.

As you can see from the graph above, the spread profits from an increase in the underlying at expiration. The profitable range for the spread at expiration is $42.55 and $50. Above $50, the spread starts to lose money with unlimited risk. The maximum profit potential of $1,225,000 occurs at an underlying stock price of $45 at expiration.

The line shown is the upper break even price at expiration. It's interesting to note that the underlying stock would have to make new highs in order for this spread to be profitable at expiration. The 52-week range for BIG is a low of $27.82 and a high of $42.27. BIG traded 19,763 contracts today compared to average daily volume of 3,088.

Big Lots, Inc. is a closeout retailer. The Company's merchandising categories include Consumables, Home, Furniture, Hardlines, Seasonal, and Other. According to Google Finance, BIG has a lower P/E ratio and Price-to-sales ratio than competitors Family Dollars Stores (FDO), Dollar General Corp. (DG), 99 Cents Only Stores (NDN), and Dollar Tree, Inc. (DLTR).

On March 3rd, BIG reported Q4 EPS of $1.46, beating consensus estimates of $1.38 per share. Revenues for the quarter were up 3.8% year-over-year to $1.52 billion, in-line with consensus estimates. Comparable stores sales for the quarter, for stores open at least two y ears, were flat compared to the year ago quarter.

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