Back on August 15th shares of The Home Depot (HD) had a negative reaction (closing down 2.65% on the day) following what was, for the most part, a very solid Q2 and guidance. Now with the series of storms battering the gulf coast the stock is back in the news. HD initially traded poorly during Hurricane Harvey’s devastation but then caught a bid last week as it Hurricane Irma strengthened and the country was looking at a one two punch. The stock stopped on a dime on Friday at the prior all time high in May:
Today’s pullback might have something to do with the fact that Irma’s destruction in Florida was not as bad as feared in the massive population center of Miami (obviously subjects like this on Wall Street always seem a bit tone deaf, trading based on the potential for Hurricane clean up 🙁 But nonetheless storms are market movers).
For our purposes, I think it makes sense to go back to mid-August and consider the stock’s poor reaction to what was supposedly good fundamental news. Last week’s matched high gives traders, both bullish and bearish something to shoot against. With the broad market up more than 1%, looking poised to make a new all time high this week, it is safe to suspect that HD, a stock that has dramatically outperformed the S&P 500 (SPX) ytd, up 18% vs 11% is likely to participate, breaking out of a 4 month consolidation between $145 and $160. Options premiums are not exactly cheap though, with 30 day at the money implied volatility about 17%.
If I were inclined to play for a breakout I would consider a call calendar, selling a shorted dated out of the money call and using the proceeds to help finance the purchase of a longer dated call. For instance, with the stock at $158, the Sept 15 (weekly)/ Oct 160 call calendar is offered at $2, selling 1 Sept 15th weekly 160 call at 60 cents and buying 1 Oct 160 call for 2.60. The max risk is the 2.60, if the stock is 160 or below on this Friday’s close the Sept weekly call will expire worthless and you own the Oct 160 call for $2, which at that point you could further reduce the premium at risk by selling a higher strike call in Oct creating a vertical calls spread.
The next identifiable catalyst for HD will be their Q3 earnings on Nov 14th.