Home Depot Inc (NYSE:HD) has put in quite the performance during the past four months. HD stock is up 20%-plus since early November, and is now trading in all-time high territory.
With the housing market improving as homebuyers rush to get in before the Federal Reserve hikes rates any higher, HD stock is experiencing a halo effect. But while the long-term outlook remains solid, Home Depot stock could be in for a short-term correction.
What This Means for HD Stock
Don’t get me wrong. There is quite a bit to like about HD stock. The shares have so far been insulated from the retail malaise that has dogged other retailers, such as Target Corporation (NYSE:TGT) and J C Penney Company Inc (NYSE:JCP). As Laura Hoy puts it, Home Depot and the “DIY industry appears to be relatively insulated from that trend.”
What’s more, HD stock has a strong following within the brokerage community. Specifically, Thomson/First Call reports that 24 of the 32 analysts following the shares rate them a “buy” or better, with nary a “sell” to be found. The 12-month consensus price target also rests at a modest $156.10, and could reasonably see an increase or two in the coming months.
The problem for HD stock remains purely a technical issue. There is quite a bit of froth in the market right now, with stocks trading near all-time highs across the board. Like many other Dow Jones Industrial Average members, Home Depot could use a bit of a correction before the shares start a serious move higher — especially with the summer home buying season just around the corner.
Click to Enlarge HD Options traders tend to agree with this short-term outlook. Currently, the April put/call open interest ratio for HD arrives at an elevated perch of 1.35.
In other words, puts outnumber calls among options set to expire within the next month, as traders anticipate a near-term pullback or short-term stagnation in HD stock.
Overall, April implieds are pricing in a potentially modest move of about 2.8% for HD stock ahead of expiration. This places the upper bound at $$152.14, while the lower bound lies at $143.86.
A rally north of $150 would be a major coup for HD bulls at the moment, and potentially establish a higher floor of support for the shares. Meanwhile, a pullback to the $143 region would mark a buying opportunity for HD bulls, as the shares should find support at their rising 10-week moving average.
2 Trades for HD Stock
Put Sell: Typically, I recommend put sell positions as a way to capture premium on a stock that will stagnate over the short term. However, you can also use these options as a way to basically name the price you want to pay for a stock. Since there is the possibility of a short-term correction for HD stock, you could use a put sell position to acquire the shares if they hit your desired price target — and get paid to do so.
Say you want to own HD stock, but you’d rather wait for the shares to pullback to $145 before diving in … in this case, sell an April $145 put for $1.10, or $110 per contract, collect the premium, and wait for the shares to pull back to your target.
If HD stock doesn’t trade below $145, you keep the premium and roll your target out to the next contract month and try again. The downside here is that if HD never hits your target, you never own the shares at the price you want to pay.
Call Spread: If you’re not buying the idea of a short-term pullback for HD stock, you can always bet on a continued rally by jumping into a bull call spread. In this case, an April $149/$150 bull call spread looks promising. At last check, this spread was offered at 35 cents, or $35 per pair of contracts. Breakeven lies at $149.35, while a maximum profit of 65 cents, or $65 per pair of contracts, is possible if HD stock closes at or above $150 when April options expire.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
