Home Depot Options Traders Expect a Post-Earnings Pullback

Home Depot reports earnings before the market opens on Tuesday

Josh Selway
Aug 14, 2017 at 2:24 PM
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Last month, Dow stock Home Depot Inc (NYSE:HD) got hit by news of a partnership between Sears and Amazon. It didn't take long for shares of the home improvement issue to snap back, however, with HD stock logging an eight-day winning streak earlier this month. With the company scheduled to report earnings before the open tomorrow, Home Depot shares were last seen trading near $154, and options traders are expecting the equity to pull back sharply after the quarterly event. 

Specifically, the August 150 put, which expires at the end of this week, saw the largest increase in open interest over the past 10 days. Data from the major exchanges confirms mostly buy-to-open activity here, meaning these traders are betting on HD shares falling below $150 by the end of the week. 

These bears aren't alone, however. The second-most popular option during the past two weeks was the October 145 put, which also saw heavy buying activity. In other words, these are even more ambitious bears, eyeing a move down to $145 from Home Depot stock. It's worth noting that the security has only breached this level once since the end of February. In fact, the $145 region acted as support for HD from March to April and through its recent Amazon-induced pullback. 

In today's trading, puts are trading at roughly two times the expected pace once again. Looking at the top trades, it would seem traders are opening long put spreads by buying to open the August 152.50 puts and selling to open the August 147 puts. These speculators are looking for a move down to $147 for Home Depot. 

As would be expected ahead of earnings, you'll have to pay up to buy short-term HD options. For instance, the stock's 30-day at-the-money implied volatility of 20.3% ranks in the 92nd annual percentile. 

What's more, it seems options traders are expecting a bigger-than-expected move from Home Depot stock. Specifically, the options market is pricing in a swing of 4.9%, regardless of direction, for the shares tomorrow. Compare this to HD's average single-day post-earnings move of just 2% over the past eight quarters. During that time, the equity has ended the next day higher on five occasions, closing lower three times.  

In the meantime, analysts still have high hopes for the blue chip. For starters, 11 of 18 analysts rate Home Depot a "buy" or "strong buy," with zero "sell" ratings to be found. Plus, HD has an average 12-month price target of $171.27 -- an 11.2% premium to the current level of $154.311 and in record-high territory. 

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