We kicked off the latest round of Income Madness on Feb. 15, just a few days after the Kansas City Chiefs won Super Bowl LVIII. As such, many traders had pizza stocks on the brain and a few asked us whether there was an opportunity there.
Typically, the pizza companies have fairly light volume and open interest in their options chains with the exception of the monthly expiration dates. However, an interesting opportunity presented itself with Domino’s Pizza (DPZ) during the final Income Madness Live Trading Session on Friday, Feb. 23.
The company was due to report earnings on Monday morning before the market open. Due to the pending announcement, options liquidity had improved and the stock was sporting an implied volatility rank (IVR) of around 60%, with IV much higher than historical volatility.
At the time, we noted that it was a risky trade. The one-day expected move was 6%, or around $24 per share. Keep in mind that the expected move could be in either direction, and even a solid report wouldn’t guarantee that shares moved higher. Plenty of companies see their stock sell off after beating estimates. Hence, the above-average risk of this trade.
For its part, Domino’s had beaten analyst estimates in the previous three quarters. Following those reports, DPZ tended to trade higher initially before selling off.
So, on that Friday afternoon, we recommended members enter a bull put spread with a March 15 expiration. We set the top leg of the spread at the 400 strike, which was 14% out of the money (OTM) and well outside of the expected move.
For a 10-wide spread — buying the DPZ 15 Mar 400 Put and selling the DPZ 15 Mar 390 Put – we collected a net credit of $1.48. We sold three contracts in our live account, generating $4.44 in cash. And we set a target price of $0.50, telling members to set a good ‘til canceled (GTC) order to exit the spread at that level.
On Monday morning, Domino’s reported fourth-quarter earnings that beat expectations. Comparable sales also exceeded the consensus estimate of 2.2%, coming in at 2.8%. Additionally, the company announced a 25% quarterly dividend hike and a $1 billion share buyback.
DPZ rallied sharply in pre-market trading and our GTC order triggered on the market open. We booked a profit of $0.98, or $98 per spread, for a total of $294 for three contracts. Since the trade required just $1,000 in capital per spread, we earned a 9.8% return on a trade open less than 24 market hours.
This makes DPZ one of our shortest-duration positions of this round of Income Madness, along with our one-day Nvidia (NVDA) trade and two-day Costco (COST) trade.
So far, we’ve closed 11 of our 20 Income Madness trades and we’re closing in on $3,000 in cash booked, well exceeding our $1,000 goal.
