As a homeowner, I am a fan of Home Depot Inc (NYSE:HD) stores. Somehow, I find myself making several trips a month to my local store. I am also impressed with HD’s management. They seem to know how to extract the most of their clients’ potential. Even though I get better customer support at Lowe’s Companies, Inc. (NYSE:LOW), I prefer shopping at Home Depot for the serious projects.
Fundamentally, HD stock managed to thrive as the U.S. exited the worst real-estate downturn in recent history.
HD Stock Movement
Technically the HD stock price has been chopping about but in a really wide range. Home Depot is currently atop a three month old 15% rally that erased a huge dip which started last August. It still looks constructive to me.
Usually, I am not one to chase big rallies late, especially when they make all-time highs. But in this case, I will take a lotto ticket into HD stock.
Click to Enlarge Last week, the manner by which Home Depot stock breached the roof may invite more momentum buyers to set even higher highs. I will use the Home Depot options market and risk a little to capture the better part of the next $5 rally.
The Bet: Buy HD March $140/$145 debit call spread. This is a bullish trade for which I pay $1.80 per contract to open. This is my maximum potential risk. If Home Depot rallies past my spread, I stand to double my money.
Usually I like to hedge my bets by selling risk to reduce my out-of-pocket expense. But in this case, I will defer this for a few days. What I see in the open interest tells me that the rally could face some resistance through this week. Nevertheless, here is the trade I would add to my bullish bias.
The Hedge (optional): So if HD dips a little, I would then sell Aug $110 put and collect about $1 per contract. This is a bullish trade with a 20% buffer from current price and a 90% theoretical chance of success. I only sell naked puts if I am willing and able to own the stock at the strike sold.
I can modify the sold put into a credit put spread to better suit a more conservative taste.
The Twist (optional): Sell HD Aug $115/$110 credit put spreads. For this I collect 35 cents to open. The buffer here is a little smaller than the naked put sold but still carries a potential 8% yield on money risked.
If Home Depot stock stays above my sold strikes, then I would have eliminated my debit call spread entry price. If so, then any premium I recapture by selling the debit call spread would be pure profit. I do need to note that the upcoming HD earnings could add temporary pressure as they add a binary effect independent of real fundamentals.
I am not required to hold my positions into expiration. I can close any of them at any time for partial gains or losses.
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 on Twitter at @racernic and stocktwits at @racernic.
