Options Bulls Hammer Home Depot Stock After Earnings Beat

The equity sports a roughly 24% year-to-date lead

Digital Content Manager
Nov 17, 2020 at 11:01 AM
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The shares of Home Depot Inc (NYSE:HD) are down 3.2% at $270.99 this morning, despite the home improvement company reporting third-quarter earnings of $3.18 per share -- significantly better than Wall Street's estimates of $3.06 per share -- as well as a revenue beat. The company attributed the strong results to a surge in demand for tools, paint and building materials as consumers stayed home during the COVID-19 pandemic.

What's instead weighing on the Dow stock is Home Depot's announcement that it would spend an additional $1 billion on employees' compensation, and comments from analysts at D.A. Davidson and Jefferies concerned about the company's growth margins.

Home Depot stock has more than doubled off a March 18, three-year low of $140.66 to reach an Aug. 27, all-time-high of $292.95. And while the equity is now struggling with overhead pressure at the $285 level, the 120-day moving average has stepped up as support this month. Year-to-date, HD is up 24%.

An unwinding of pessimism in the options pits could push the security higher. This is per the stock's Schaeffer's put/call open interest ratio (SOIR) of 1.15, which sits higher than 80% of readings from the past year. This suggests short-term option traders have rarely been more put-biased.

That shift seems to be already happening today. So far, 20,000 calls have crossed the tape, which is five times what is typically seen at this point, and twice the number of puts exchanged. The November 275 call is the most popular, followed by the 280 call in the same monthly series, with new positions currently being opened at the former as investors expect more upside for HD by the time contracts expire this week.

A volatility crush means now is the ideal time to take advantage of Home Depot stock's next move with options. The security's Schaeffer's Volatility Index (SVI) of 27% sits in the extremely low 12th percentile of its annual range. In other words, the equity sports attractively priced premiums at the moment.

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