Domino's Pizza (DPZ) will release earnings for the quarter ending Sept. 7 at 8:30 am on Tuesday, Oct. 13. As I wrote last month, DPZ stock still looks cheap given its strong free cash flow (FCF) margins.
DPZ closed at $309.36 on Friday, Oct. 9, up from a recent trough of $292.14 (Sept. 28), but well below its peak of $367.63 on Aug. 8. I wrote about how cheap DPZ stock was in a Sept. 20 Barchart article, “Domino's Pizza Stock Is Dirt Cheap, With 30% Potential Upside - What's the Best Play?”
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DPZ stock - last 3 months - Barchart - Oct. 9, 2026 Since then, DPZ has risen, but analysts' forecasts for this year's and next year's revenue and earnings have stayed flat. However, price targets have dropped somewhat, although it's still above today's price.
For example, Yahoo! Finance's survey of 30 analysts is now $373.44, down from $381.11 in the Sept. 20 Barchart article. But this is still 20.7% higher than Friday's close.
Moreover, in my Barchart article, I showed that, assuming a 13% FCF margin next year, Domino's could generate $689 million in FCF. Using a 5% FCF yield metric, this could push its valuation to $13.78 billion, or 34.7% above today's market cap of $10.23 billion.
As a result, DPZ could be worth $416.71 per share, 34.7% more.
The bottom line is that if the upcoming results show Domino's is generating strong FCF margins. As long as it's on track to make a 13% FCF margin next year, DPZ stock is undervalued.
How to Play DPZ
In my last article, I discussed shorting the $280 put option expiring Oct. 16 for $6.60, and also buying the $280 call option expiring March 19, 2027, for $39.55.
So far, that has worked out well. The $280 put has fallen to $2.05, with just 5 more days to expiry. It's set to expire worthless if DPZ stays flat or doesn't drop 9.5% by next Friday, after Tuesday's earnings results.
In addition, the March 19, 2027, $280 call has risen to $47.25 at the midpoint, up 19.5% for the last three weeks since Sept. 20 from $39.55.
As a result, investors following these plays have made an attractive return. The investor can continue to short out-of-the-money (puts) or do a put credit spread, to pay for the call purchase.
For example, the $290 put option expiring Nov. 20, 41 days from now, has a midpoint premium of $7.60 and a relatively low delta ratio of 28.3%. That implies a 71.7% chance of success when shorting this put.
DPZ puts expiring Nov. 20 - Barchart - As of Oct. 9, 2026 The investor who posts $29,000 in collateral can then enter an order to “Sell to Open” the $290 put. The account will then immediately receive $760.
That represents an expected yield of 2.62% (i.e., $760/$29,000) over the next month or so. It will also help pay for the original call option purchase at $280, expiring March 29, 2027.
However, some investors may not be able to afford posting $29,000 in collateral to do this short-put play.
DPZ Put Credit Spread Play
One way around that is to do a put credit spread. This means the investor also buys a lower put with the short-put proceeds. The brokerage firm will require much less collateral, now that the downside is covered, except for the spread.
For example, the table above from Barchart shows that the Nov. 20 DPZ put has a $280 strike price of $5.20. So, the net collected in this $290 short and $280 long put spread is:
$760 - $520 = $240 net put credit (or $2.40 per contract)
However, the brokerage firm will only require $1,000 in collateral (i.e., $290 - $280 = $10 x 100 per contract = $1,000). The investor can then make a huge expected return (ER), as long as DPZ does not drop to between $290 and $280:
$240 / ($1000 - $240) = $240/$760 (at risk amount) = 31.578% ER
However, if DPZ drops below $287.60 (i.e., $290-$2.40 = $287.60), or 7% below the Oct. 9 close, the investor will start losing money. However, the potential loss is $760 if DPZ drops to $280 or lower.
Nevertheless, if the investor invests in 3 put contracts with a $290-$280 put credit spread, they can collect $720 (i.e., $240 x 3). This requires just $3,000 in collateral (i.e., $1,000 x 3).
That's a much lower collateral requirement than posting $29K to make $760 in a short-put play at $290.
The bottom line is that DPZ looks cheap here, and shorting out-of-the-money puts or put credit spreads are attractive DPZ plays. These prices could change after earnings come out on Tuesday.
On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
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