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Discounting Bulls Turn to Family Dollar

By David Russell, reporter at OptionMonster

NEW YORK -- Option activity lit up in Family Dollar (FDO) on Friday as discount retailers returned to favor.

OptionMonster's tracking programs detected the purchase of about 6,900 April 62.50 calls against previous open interest of just 1,177 contracts. The initial blocks priced for about $1.20, followed by larger prints for $1.50. Then the stock pushed higher and those contracts traded for as much as $1.99, which demonstrates the kind of leverage that can be produced with options.

It works because calls lock in the price where shares can be bought. But they're much cheaper, so even a relatively small move in the stock price can make the calls double or triple.

Family Dollar rose 2.54% to 61.37 on Friday and is up 8% in the last month. Its next earnings report is scheduled for April 10. Total option volume in the company was 14 times greater than average, with calls outnumbering puts by a bullish 48-to-1 ratio.

Discount retailers rallied strongly as a group coming out of the 2008 financial crisis but then entered a phase of weakness in mid-2012. They've started regaining their momentum in the last month, however, after strong quarterly results from Dollar Tree (DLTR) and bullish call-buying in Dollar General (DG). TJX (TJX) has also broken out to new all-time highs.

Russell has no positions in FDO.

This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

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