Family Dollar Stores (FDO) Ready to Break Out

11/19/2009 12:01 am EST

Focus: STOCKS

Elizabeth Harrow

Financial Analyst, Schaeffer's Investment Research, Inc.

Call players have rarely felt more upbeat toward Family Dollar Stores, Inc. (FDO). The stock sports a ten-day International Securities Exchange (ISE) call/put volume ratio of 3.58, indicating that calls bought to open have more than tripled puts during the past two weeks. This ratio ranks higher than 91.7% of other such readings taken within the previous year, suggesting that traders have purchased calls over puts at a faster pace less than 9% of the time.

FDO price chartIn keeping with this optimistic theme, FDO's Schaeffer's put/call open interest ratio (SOIR) arrived today at 0.48, with calls more than doubling puts among options set to expire within three months. This marks a fresh annual low for the indicator, as short-term speculators are more bullishly aligned toward the equity now than at any other time during the past year.

In fact, on Monday, traders on the ISE bought to open 1,300 calls on FDO, compared to just one put. Among near-term options, call players have set their sights on the stock's 30-strike options. This narrowly out-of-the-money strike is home to peak call open interest for the November, December, and January 2010 series, with nearly 29,000 contracts in residence across all three series.

After taking a closer look at the rest of the stock's sentiment backdrop, it seems likely that some of these call purchases might have been initiated by short sellers looking to hedge their bearish bets. Short interest on FDO rose by 19.3% during the past month, and now accounts for 8.4% of the equity's float.

With FDO threatening to break out above $30, it's possible that some of these skeptics are feeling anxious about their short stock positions. However, they can rest easy for today-FDO was off 1.2% at last check to trade at $29.87. The stock is not only facing round-number pressure, it's also battling newfound resistance from its formerly supportive 40-week moving average.

By Elizabeth Harrow of Schaeffer's Trading Floor Blog

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