Put Buyers Blitz Home Depot Stock Before Earnings

The home improvement stock was overbought heading into today

Managing Editor
Feb 25, 2019 at 2:01 PM
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Home improvement retailer Home Depot Inc (NYSE:HD) is down 0.4% at $191.67 in afternoon trading. Options traders are positioned for even bigger losses for the Dow stock after the company's fourth-quarter earnings report, due before the market opens tomorrow, Feb. 26. Here's a closer look at how HD stock has been performing in the lead up to this scheduled event, and what the options market is pricing in for Tuesday's trading.

Home Depot stock has been climbing the charts of late, recently overtaking former resistance at its 200-day moving average, as well as the $190 level. The security has added 21.2% since its Dec. 24 bottom at $158.09. As such, its 14-day Relative Strength Index (RSI) closed Friday at 70 -- in overbought territory, suggesting a short-term pullback may have been in the cards.

Daily HD with 200MA SInce FEb

Diving into HD's earnings history, the stock has closed lower the day after five of the company's past eight quarterly reports, including the last four in a row. Overall, the shares have averaged a relatively slim 1.1% swing the day after reporting, regardless of direction. This time around, Home Depot options are pricing in a much wider 5% swing for Tuesday's trading.

Looking at options, data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) shows the Lowe's (LOW) competitor with a 10-day put/call volume ratio of 1.36, which ranks in the 98th annual percentile. In other words, put options have been purchased over calls at a faster-than-usual clip of late.

Echoing this, the home improvement stock's Schaeffer's put/call open interest ratio (SOIR) of 1.22 lands in the 94th percentile of its annual range. This suggests that near-term options traders are more put-biased than usual right now.

Drilling down, the March 185 put has seen the largest increase in open interest over the past two weeks, and is now home to peak open interest of 7,899 contracts. Data from the major options exchanges confirms some buy-to-open activity here, which indicates that buyers expect the stock to travel back below $185 by front-month expiration at the close on Friday, March 15.

 

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