Premium Sellers Blast Home Depot Stock Before Earnings

HD stock has a history of muted earnings reactions

by Karee Venema

Published on May 14, 2018 at 11:41 AM

Retail earnings season is heating up, with home improvement name Home Depot Inc (NYSE:HD) scheduled to report its first-quarter results before the market opens tomorrow, May 15. The Dow stock has a history of muted earnings reactions -- averaging a next-day move of just 1.5% over the past eight quarters -- and options traders appear to be betting on more of the same.

Specifically, HD's May 182.50 put has seen the biggest rise in open interest over the last two weeks, with 7,255 contracts added. Data from Trade-Alert indicates the bulk of this action occurred last Thursday, May 9, when several mid-sized blocks were sold to open. If this is the case, the traders expect Home Depot to settle north of $182.50 at this Friday's close, when front-month options expire.

However, the put writers may also be betting on a post-earnings volatility crush. Heading into a known event like earnings, volatility is often bid higher, creating richer premiums. After the uncertainty of the event is lifted, implied volatilities tend to drop sharply -- a potential boon for premium sellers. Most recently, the implied volatility (IV) term structure for front-month HD options was 38.03%, compared to the monthly June options IV term structure of 21.86%.

Although HD stock's recent history of earnings reactions has been mostly negative -- the shares have closed lower the day after their report in five of the last eight quarters -- the current trend appears to be to the upside. The security is up almost 12% since it bounced off its 200-day moving average in early April, last seen trading 0.2% higher at $190.67. Above here, though, is potential resistance near $192.40, which is a 23.6% Fibonacci retracement of HD's rally from its July lows to its January record high at $207.61.

hd stock daily chart may 14

Against this backdrop, sentiment outside of the options arena is upbeat. Of the 27 brokerages covering Home Depot shares, 22 maintain a "buy" or better rating, with not a single "sell" to be found. Plus, the average 12-month price target of $211.24 is a 10.4% premium to current trading levels.

Shorts have been hesitant to bet against HD stock, too. The 9.8 million shares sold short represent less than 1% of the equity's available float, and would take just two days to cover, at the average pace of trading.

Microsoft Options Price In Bigger-Than-Usual Post-Earnings Swing
Options buyers expect an extended run to record highs
This Sentiment Signal Also Flashed in March 2009
AAII bulls jumped by the most since the 2016 election last week
Stock Phenomenon Could Mean Sluggish Market Ahead
Up days have outnumbered down days so far, but the return has been minimal
From Schaeffer's Pro Traders
Weekly Options Secrets Revealed

Direct from our Schaeffer's traders, your FREE guide to winning with weekly options!


Partnercenter


NEW! Explore Schaeffer’s Partners' deals and get connected to top online brokerages with deals tailored exclusively for our readers.  Get answers to your questions regarding transfer fees, commission rates, programs and available discounts related to online trading services.

MORE | MARKETstories


Trading Earnings Releases with Options
There are several “conventional” methods of trading earnings that most option traders are taught... Sponsored by TheoTrade
Dunkin Stock Earns More Wall Street Praise
Rival Starbucks, on the other hand, hasn't been as lucky
Twitter Stock Downgraded As Earnings Approach
TWTR has more than doubled year-over-year
Trading Earnings Releases with Options
There are several “conventional” methods of trading earnings that most option traders are taught... Sponsored by TheoTrade