With a mild winter hopefully behind us and spring just around the corner, it may be time for some spring cleaning and some home-improvement projects. Maybe the same could be said for your stock portfolio!
Portfolios need to be maintained like houses, otherwise they can fall into disrepair (or at least attract some proverbial cobwebs). Sometimes, a little bit of sprucing up is in order. Here is an options trading idea that can appeal to those wanting to fix up both their home and their investment accounts.
Home Depot Inc. (HD – 48.10): Long Calls
The trade: Buy the April 48 calls for $1.24 or less.
The strategy: Buying a long call is a fundamental option strategy. The trade can profit if the stock rises and the call premium increases to an amount more than the debit that was paid. Maximum profit is unlimited north of the strike price because HD can continue to rise. The maximum loss, as with all long calls, is 100% of the premium paid ($1.24 per contract) plus commissions. Breakeven for this trade, as of expiration on April 20, is $49.24 (the strike price plus the premium paid).
The rationale: HD has generally solid fundamentals with particular pockets of strength in revenue growth and earnings-per-share growth. The company has a price-to-earnings (P/E) ratio of 19.2, which is above the S&P 500 P/E ratio of 17.7. With the housing market beginning to show signs of improvement, home-improvement companies such as Home Depot should benefit.
HD shares just tagged a new 52-week high on Friday after a pullback earlier in the week. Since the beginning of October of 2011, the stock has maintained a bullish uptrend defined by higher highs and higher lows.
This at-the-money long-term call is a trade idea based on the theory that until this uptrend is broken, there is no need to stop looking for bullish opportunities. Look for an opportunity to enter this trade above $48.18, which was Friday’s high. A drop below $46 in HD would violate the uptrend in the short term. Hopefully a move below this level doesn’t happen anytime soon!
As of this writing, John does not own any shares mentioned here.
