Pre-Earnings Options Traders Rush Home Depot Inc (HD)

Home Depot Inc's (NYSE:HD) May 140 call is popular ahead of the firm's early morning earnings report tomorrow

by Karee Venema

Published on May 16, 2016 at 2:30 PM
Updated on Jun 24, 2020 at 10:16 AM

Wall Street is getting a closer look at where some of the most notable investors are placing their bets, as the Securities and Exchange Commission (SEC) releases quarterly filings. Warren Buffett's Berkshire Hathaway Inc. (NYSE:BRK.A), for instance, initiated a massive stake in Apple Inc. (NASDAQ:AAPL), while Gabe Plotkin's Melvin Capital took a new position in fellow Dow stock Home Depot Inc (NYSE:HD). As such -- and ahead of tomorrow morning's earnings report -- HD stock is up 2.1% at $135.92, and options traders are rushing to get in on the action.

By the numbers, around 36,000 call options have changed hands, compared to about 22,000 put options, and about five times the average intraday pace. The soon-to-expire May series is hot, accounting for eight of HD's most active options. Seeing the most action so far is HD's May 140 call, where there appears to be a mix of buy- and sell-to-open activity happening -- a theory echoed by data from the International Securities Exchange (ISE).

For those buying to open the out-of-the-money calls, the goal is for HD to rally north of $140 -- and eclipse last Tuesday's all-time peak of $137.82 -- by this Friday's close, when the front-month options expire. Conversely, call writers expect HD stock to remain south of the strike price through options expiration.

More broadly speaking, HD options traders have shown a preference for calls over puts among options expiring in three months or less. In fact, the security's Schaeffer's put/call open interest ratio (SOIR) of 0.86 rests lower than 96% of all comparable readings taken in the past year. Plus, HD's front-month gamma-weighted SOIR of 0.54 shows that near-the-money calls nearly double puts among options expiring at Friday's close.

Technically, today's positive price action just echoes HD's longer-term trajectory, with the shares up 24% from their Feb. 8 year-to-date low of $109.62. What's more, after notching its all-time best last week, Home Depot Inc (NYSE:HD) pulled back to its 40-day moving average. According to Schaeffer's Senior Quantitative Analyst Rocky White, in the last nine times this signal has occurred in the past three years, the stock has been positive 63% of the time 21 days out, averaging a gain of 0.9%.

HD daily chart

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