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Home Depot – Stock Up on HD Stock Spreads Before Earnings

With Wall Street cautiously optimistic about HD earnings, this bull call spread looks like the right approach


Home Depot HD stock

Home improvement retailer Home Depot (HD) will stride into the earnings confessional ahead of the open of trading Tuesday, Aug. 19.

Home Depot has been firing on all cylinders, as consumers turn to do-it-yourself projects to save a few bucks. And in turn, HD stock has ridden this wave toward all-time high territory heading into the report.

Yet … at least a couple Wall Streeters seem nervous.

For the record, the consensus is projecting a 5% year-over-year jump in revenue for Home Depot, with sales seen coming in at $23.61 billion. Meanwhile, earnings are expected to jump roughly 17%, rising from $1.24 per share a year ago to $1.45 per share in the most recent quarter.

Expectations for Home Depot’s report might be a bit higher among many on Wall Street, however. Specifically, EarningsWhisper reports that the whisper number for Home Depot’s second quarter report arrives at $1.48 per share, a 3 cent premium to the consensus estimate.

The company deserves the bullish padding, however, as Home Depot has been a strong performer in the earnings confessional. In fact, during the past five years, Home Depot has matched or bested Wall Street’s estimates. Maybe this explains why 21 of the 29 analysts following HD stock rate it a “buy” or better, compared to just 8 “holds,” and no “sell” ratings.

Options traders, on the other hand, appear to be taking a cautious stance ahead of Home Depot’s report.

Looking at the front two months of options, HD stock has attracted 37,852 put contracts compared to 38,785 call contracts. The result is an August/September put/call open interest ratio of 0.97, with calls and puts in near-parity.

Furthermore, this ratio rises to 1.19 when we look at just HD’s August options.

hd stock earnings
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Overall, weekly August option implieds for HD stock are pricing in a potential post-earnings move of nearly 5%. This places the upper bound near $86.28, while the lower bound lies at $81.72.

Options Trade on HD Stock

Traders looking to join the bullish bandwagon might want to consider a Sep $82.50/$85 bull call spread.

At last check, this spread was offered at $1.29, or $129 per pair of contracts.

Breakeven lies at $83.79, while a maximum profit of $1.21 is possible if HD stock closes at or above $85 when September options expire.

As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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