Out-of-the-Money Calls Could Cause Trouble for The Home Depot, Inc.

The Home Depot, Inc. (HD) attracted a flood of call buying on Tuesday, as speculators on the International Securities Exchange (ISE) bought to open 5,008 of these bullishly oriented bets. By contrast, traders on the ISE bought to open just 355 puts during the course of the session, revealing a clear bias toward calls over puts.

Yesterday's bout of upbeat speculation was nothing new for HD, which has now racked up a 10-day ISE call/put volume ratio of 2.75. In other words, calls bought to open have nearly tripled their put counterparts during the past two weeks. This ratio ranks higher than 94.2% of other such readings taken within the previous year, as HD's options traders have rarely bought calls over puts at a faster pace.

Option traders aren't the only group backing away from bearish bets on the retailer -- short interest on HD fell by 10.2% during the most recent reporting period, and now accounts for just 2.5% of the equity's available float.

But this dip in short interest might not reveal a rising bullish mood among the shorts. Instead, it could be a matter of simple profit-taking, since HD has pulled back more than 12% from its near-term peak of $28.44, touched back in mid-September.

During the short term, heavy call open interest could exacerbate HD's technical troubles. The stock is trading just fractionally north of peak call open interest of 21,680 contracts at the November 25 strike, and another notable accumulation of 14,600 contracts can be found at the November 26 call. These strikes could exert options-related pressure as expiration approaches.

However, one potential catalyst for the stock could be HD's third-quarter earnings report, which is due out before the market opens on Nov. 17 -- just a few days before November expiration.

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