Making the most of a lower price for shares of Dollarama Inc.
As the following graph shows, the share price of Dollarama Inc. (DOL) fell $22.60, from a high of $170.00 reached on January 29 to a low of $147.40 on February 9, 2018. DOL then rallied to $158.97, right up to the level of its moving averages. Since then, the stock has been below its moving averages, and if it continues to fall, there is a chance that it could reach $136.37 over the next few weeks. That level would represent a decline of $22.60 from its recent high of $158.97.
Daily Chart for DOL ($153.03 on Friday, February 23, 2018)
An investor interested in profiting from this scenario could buy put options expiring on July 20, 2018, selecting a strike that would produce the best return if the stock reaches a price of $136.37 on expiration.
We will choose from among the following puts:
- DOL 180720 P 155 at $11.25
- DOL 180720 P 160 at $14.05
- DOL 180720 P 165 at $17.35
Position
Comparative Table of Put Options
As the above table shows, of these three put options, DOL 180720 P 160 at $14.05 has the optimal combination of risk and return, offering a potential return of 68.19% if DOL reaches the target price of $136.37 on July 20, 2018.
We therefore execute the following transaction:
- Purchase of 10 put option contracts DOL 180720 P 160 at $14.05
- Debit of $14,050
Profit and loss profile
Target price on the put options DOL 180720 P 160 = $23.63 ($160.00 – $136.37)
Potential profit = $9.58 per share, for a total of $9,580
Potential loss = $14.05 per share, or $14,050
Intervention
Even though the target price for DOL shares is $136.37, our potential profit is tied to the target price of $23.63 on the puts. Consequently, as soon as the price of the puts reaches $23.63, we will liquidate the position, even if DOL has not yet reached the target price of $136.37. Furthermore, in order to avoid incurring the maximum loss of $14,050, it would be prudent to take a loss by liquidating the put options if DOL rises above its recent high of $158.97.
Good luck with your trading, and have a good week!
The strategies presented in this blog are for information and training purposes only, and should not be interpreted as recommendations to buy or sell any security. As always, you should ensure that you are comfortable with the proposed scenarios and ready to assume all the risks before implementing an option strategy.
President
Monetis Financial Corporation
Martin Noël earned an MBA in Financial Services from UQÀM in 2003. That same year, he was awarded the Fellow of the Institute of Canadian Bankers and a Silver Medal for his remarkable efforts in the Professional Banking Program. Martin began his career in the derivatives field in 1983 as an options market maker for options, on the floor at the Montréal Exchange and for various brokerage firms. He later worked as an options specialist and then went on to become an independent trader. In 1996, Mr. Noël joined the Montréal Exchange as the options market manager, a role that saw him contributing to the development of the Canadian options market. In 2001, he helped found the Montréal Exchange’s Derivatives Institute, where he acted as an educational advisor. Since 2005, Martin has been an instructor at UQÀM, teaching a graduate course on derivatives. Since May 2009, he has dedicated himself full-time to his position as the president of CORPORATION FINANCIÈRE MONÉTIS, a professional trading and financial communications firm. Martin regularly assists with issues related to options at the Montréal Exchange.
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