Dillard's (DDS) - Get Free Report reported disappointing quarterly financial results before the stock market opened on Monday. Revenue and earnings missed analysts' expectations, and same-store sales declined 4%. Earnings per share came in at $1.19, a penny shy of the analyst consensus, while revenue of $1.435 billion fell short of the average estimate of $1.49 billion.
The stock's selloff nevertheless appears exaggerated. The chart below tells the story.
The stock closed Monday at $72.52, down 6.4% for the session but a whopping 15% from Thursday's close. This precipitous selloff suggests there will be a rebound in coming sessions. Technical analysis supports this thesis.
The stock's price gapped down two days in a row, moving sharply below support. On Monday, the stock also had its largest trading volume in six months. Such a spike often signals a coming reversal. Additional confirmation was seen in momentum as measured by the relative strength index, which moved 4.4 points below the "oversold" index value of 30.
With this many strong reversal signals, we expect a bounce or, at the very least, an evening out of the price. So with that in mind, we think selling the December 70 put option looks like an attractive trade. With 31 days to go, this 70 put closed on Monday at a bid of $180, which means it will net $171 after trading costs. Given that the uncovered sale of the put option has the same market risk as a covered call option, this is a reasonable swing trade right now.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.
Besides blogging at TheStreet.com, Michael Thomsett also blogs at theCBOE Options Huband several other sites. He is author of 11 options books and has been trading options for 35 years. Thomsett Publishing Website