HD Post-Earnings Downshift Bodes Well For Options Bears

Threats of a softening housing market and forthcoming tariffs sent HD lower after earnings

Deputy Editor
Nov 13, 2018 at 12:16 PM
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At last check, shares of Home Depot Inc (NYSE:HD) are down 1.5% to trade at $176.75, in spite of the retail name's better-than-expected third quarter earnings. The post-earnings downshift comes after the home improvement company said tariffs will have an impact on prices at its retail locations.

HD announced third-quarter earnings per share of $2.51, which beat out the mean of $2.26 expected by analysts. Same-store sales improved by a stronger-than-forecast 5.4%, and net revenue of $26.30 billion also topped estimates. Despite "moderating" home prices, Home Depot's CEO Craig Menear also remains positive on the housing market's "overall strength of demand."

Home Depot shares fell 3.5% in Monday's heavy selling, settling at $179.43 after brokerage firms RBC and J.P. Morgan Securities both slashed their respective price targets to $208, in response to declining home prices 

Despite growing concerns about a slowing housing market, most have remained bullish on the retail concern, with 21 of 25 analysts calling it a "buy" or better. Plus, HD would need to rally 20% to hit its current $211.38 target price. 

Looking towards options trends, traders were taking a more bearish stance than usual ahead of earnings, with a 10-day put/call ratio of 0.94 on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) that ranks in 97th percentile of its annual range. This indicates a push toward puts, with traders picking them up at a much faster than usual pace.

What's more, HD's Schaeffer's Volatility Scorecard (SVS) sits at a high 92 out of a possible 100, indicating the stock's tendency to make outsized moves this year, relative to what the options options market has priced in -- a boon to premium buyers. 

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