Pre-Earnings Options Activity Bullish for Home Depot Stock

Near-term Home Depot call options have been popular in recent weeks

by Josh Selway

Published on Nov 13, 2017 at 2:00 PM

Bullish options traders have been circling Home Depot Inc (NYSE:HD) ahead of the company's earnings release Tuesday morning. Data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) shows a 10-day call/put volume ratio of 3.51, meaning more than three long calls have been purchased for every put. Moreover, this ratio ranks in the high 90th annual percentile for HD stock, revealing such a preference for calls over puts has been very rare.

A closer look clearly shows speculators betting on extended upside for the shares. Specifically, the weekly 12/1 165-strike call saw the largest increase in open interest during the past 10 days, closely followed by the front-month November 165 call, then the December 170 call and January 2018 165-strike call. The major options exchanges confirm substantial buy-to-open activity at each of these strikes.

Taking a broader view, peak open interest now resides at the front-month November 170 call, and the November 165 is third on the list. Second place belongs to the January 2018 180-strike call.

This bullish bias is shared by the analyst community. Twelve of 19 brokerage firms rate Home Depot stock a "buy" or "strong buy," with zero "sell" recommendations on the books. The average 12-month price target, meanwhile, sits up in record-high territory at $173.94. Just this morning, J.P. Morgan Securities hiked its price target to $184 from $172.

HD shares were last seen trading up 1.1% at $165.93, bringing their one-year advance to nearly 28%. The equity touched a record high of $167.94 on Oct. 26, and although provisions in the GOP's tax plan pulled it from these levels, it found strong support at the 50-day moving average.

This technical outperformance has come despite lackluster post-earnings sessions. Last quarter, for instance, the Dow component dipped 2.7% after earnings, and in this quarter last year shed 2.6% in the session after reporting. This time around, the options market is pricing in a larger-than-normal move of 4.8%, which is more than twice that of HD's average one-day post-earnings swing of 2% from the past eight quarters.
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