Dow component and home improvement retailing giant The Home Depot, Inc. (HD) has been in rally mode during the past several weeks, with Wall Street snapping HD stock on reports of a strengthening home-repair/remodeling market.
The company is slated to report third-quarter earnings next week, and with HD stock near all-time highs, traders should be rightly concerned about the stock’s post-earnings upside potential.
Most analysts are expecting a solid performance out of Home Depot, with earnings projected to come in at $1.13 per share, up 19% from the same quarter last year. There are bullish murmurs, however, that Home Depot earnings will come in stronger than expected, with EarningsWhisper.com reporting a third-quarter whisper number of $1.16 per share for the company.
What’s more, there are murmurs on Wall Street that Home Depot’s bottom line improved more than expected. Specifically, EarningsWhisper.com reports a third-quarter whisper number of $1.16 per share for Home Depot earnings. Given that the company has topped the consensus estimate in every quarter but one since 2011, the whisper number seems par for the course.
In fact, bullish sentiment is rampant when it comes to Home Depot’s outlook. According to data from Thomson/First Call, HD stock has attracted 21 “buy” ratings and nine “holds,” with nary a “sell” rating to be found. The stock is trading just a dollar shy of the 12-month consensus price target of $100, but if the company’s quarterly report comes in strong, price target increases could create additional buying pressure.
Options data, on the other hand, isn’t looking quite as rosy. The put/call open interest ratio for the front two months of options arrives at 1.41, with puts outnumbering calls in the November and December series. Narrowing our field down to just those options set to expire at the end of next week, the front-month November put/call open interest ratio dips slightly to 1.24, but still shows a distinct bias for put contracts.
Click to Enlarge Overall, November implieds for HD stock are pricing in a potential post-earnings move of about 3.8%. This places the upper bound at $102.76 — a fresh all-time high for HD stock — while the lower bound arrives at $95.24, which is near support at the stock’s 10-day moving average.
2 Options Trades on HD Stock
I’m not liking HD stock’s upside potential with the shares trading near all-time highs and overbought levels while staring down the century mark. That’s not to say shares won’t move higher after earnings — it’s just that HD stock might not move fast enough for a traditional short-term options trade to realize a significant profit.
Bull Call Spreads: That said, those willing to take a shot might want to consider a Dec $97.50/$100 bull call spread. At the close of trading yesterday, this trade was offered at $1.36, or $136 per pair of contracts. Breakeven lies at $98.86 (though this is sure to change with the open this morning), while a maximum profit of $1.14 is possible if HD stock closes at or above $100 when December options expire.
Put Sells: However, if you are like me and not so sure about HD stock’s upside potential, you might want to consider selling a little option premium and banking on technical support. Specifically, a Nov $90 put sell stands a good chance of finishing out of the money. At the close last night, the Nov $90 put was bid at 20 cents, or $20 per contract.
With this trade, you immediately pocket the premium and keep it as long as HD trades above $90 through next week’s expiration. However, if HD trades below $90 ahead of expiration, you could be assigned 100 HD shares at a cost of $90 each for every Nov $90 put sold.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
