As a homeowner, I frequent Home Depot Inc (NYSE:HD) stores at least once a month. My visits are consistently disappointing from the customer service perspective. There used to be a time when the in-store reps walked you over to the area you seek. Now, all I get is a pointed finger in the general direction.
Nevertheless, they usually have what I need and if I do enough homework online ahead of time, I end up buying it at HD stores. So I’ve rarely bought my home improvement needs online … Yet! So Home Depot is still my go-to place for now.
Fundamentally, and from a business perspective, I like how management runs the company. With a 24 price-to-earnings ratio, the stock is priced in line with the sector. Lowe’s Companies, Inc. (NYSE:LOW), is cheaper from a book value perspective, yet I prefer trading HD.
This morning, management reported earnings and beat expectations. They also raised guidance. Yet, Wall Street cannot decide if they love it or hate it. The stock is teetering about the flat line. Since they didn’t change any of the fundamentals, I am optimistic HD for the long term.
Coming into the earnings, HD stock had been up 23% year-to-date. LOW was only up 9% so clearly I am not the only trader who favors HD. I do enjoy the LOW shopping trips better perhaps because I am not a professional construction guy and they cater to the retail clients slightly better than HD.
Technically, even though Home Depot stock has rallied so much it has established several layers of support. And therein lies my opportunity. Back in February, the stock had a clear breakout and the bulls haven’t looked back since. This is strength I can bet on.
Home Depot stock is struggling to rally behind a decent earnings report. The bulls could be tired, but still I can bet long if I leave room for error.
Click to Enlarge Today I am sharing a bullish trade setup but one that doesn’t need incremental rallies to profit. I can generate income from selling downside risk against said support zone. If they hold for the next few months then I retain maximum gains.
This allows me to participate on the bullish side with little hopium. The alternative would be for me to risk $165 per share to buy the HD stock outright then hope that it rallies with no room for error.
Consensus is muted as Wall Street experts are on “hold” to see if HD stock will live up to their price targets. It is now trading at the low end of the range. The high mark is at $189 per share and the average is $173 per share.
HD Stock Trade Idea
The Trade: Sell HD Mar 2018 $140 put for $1.50. This is a bullish trade that has an 85% theoretical chance of success. Otherwise, I will suffer losses below $138.50.
Selling naked puts carries big risk, especially for a stock that costs almost $150 to buy. For those who want to mitigate it, they can sell a spread instead.
The Alternate Trade: Sell the HD Mar 2018 $140/$135 bull put spread, where I have about the same odds of winning but with much less risk. Yet, the spread can deliver 10% in yield.
Ultimately, regardless of how careful I am, investing in stocks is fraught with danger, so I never risk more than I am willing to lose
Get my newsletter for free here. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on twitter and stocktwits.