Should Option Bears Be Sweating Ahead of Home Depot Inc (HD) Earnings?

Options traders have been extremely bearish ahead of Home Depot Inc's (HD) earnings report

Aug 12, 2016 at 3:32 PM
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Home improvement retailer and Dow component Home Depot Inc (NYSE:HD) is among a list of big retail names preparing to report quarterly earnings next week. And after some particularly upbeat results from several retail peers in recent days, shareholders will be hoping HD can follow in the footsteps of the likes of Macy's Inc (NYSE:M) and Nordstrom, Inc. (NYSE:JWN) when it reveals earnings before the bell on Tuesday. Despite the blue-chip stock's impressive technical feats, however, options traders have been busy betting against HD.

Specifically, put buying has reached extreme rates over the last 10 days at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), more than doubling the pace of call buying. In fact, the stock's put/call volume ratio of 2.08 over the period stands just 2 percentage points shy of an annual high. Near-term traders have been more put-skewed than usual toward HD, as well. The stock's Schaeffer's put/call open interest ratio (SOIR) of 1.59 is in the 89th percentile of its annual range. An unwinding of this bearish sentiment in the wake of a positive earnings result could create major tailwinds for the shares.

Digging down a bit further into HD's options pits, put open interest is currently seated at a 12-month high, with 264,166 contracts outstanding. Peak open interest on the stock resides at the deep out-of-the-money August 80 put -- but that isn't necessarily the strong bearish indicator it appears to be at first glance. In fact, data from the major exchanges confirms a healthy amount of these positions have been sold to open, and even buyers may simply be shareholders purchasing protection. On the other hand, the next highest open interest levels sit at the overhead August 140 call, where positions have largely been sold to open, suggesting options traders have been betting on a short-term ceiling for the shares through the end of next week.

On the technical front, HD has done little to deserve bearish attention. The stock hit a record high of $139 on Aug. 1, and has since pulled back to its 30-day moving average -- hinting at a potential bounce. Plus, the company's earnings history suggests more gains could be in store, as the stock -- last spotted at $136.37 -- has moved to the upside in the session following its report in five of the last eight quarters.

At least the brokerage bunch seems to be getting on board with Home Depot Inc (NYSE:HD). Nearly two-thirds of the analysts tracking the stock now call it a "strong buy," with a consensus 12-month price target of $148.05 -- in never-before-seen territory. Plus, Oppenheimer just upped its price target on HD by $4 to $154.

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