Pre-Earnings Bears Blitz Home Depot Stock

Puts have been hot ahead of HD's earnings

by Emma Duncan

Published on Aug 19, 2019 at 12:02 PM

Shares of home improvement retailer Home Depot Inc (NYSE:HD) are getting a lift from broad-market tailwinds this afternoon, up 1.9% at $207.47, and options traders are initiating positions ahead of the company's quarterly report, slated for release before the market opens tomorrow, Aug. 20. Below, we will take a look at how HD has fared on the charts of late, and dive into what the options market is expecting for the stock's post-earnings move.

Home Depot stock has been climbing the charts in 2019, with multiple pullbacks contained at the 120-day moving average. The security touched a record high of $219.29 on July 15, and is now 20% higher year-to-date.

Daily HD with 120MA

Looking into HD's earnings history, the stock has closed lower the day after earnings in all but two of the past eight quarters, though the reaction to Home Depot's most recent report in May was positive. Over the past two years, the shares have swung an average of 1% the day after earnings, regardless of direction. This time around, the options market is pricing in a larger-than-usual 6% swing for Tuesday's trading. 

Meanwhile, the stock's Schaeffer's put/call open interest ratio (SOIR) of 1.44 ranks in the 97th percentile of its annual range. Not only does this show that put open interest outweighs call open interest among options expiring within three months, but such a put-skew among near-term traders is very rare.

What's more, on the International Securities Exchange (ISE), Cboe Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock's 10-day put/call volume ratio of 1.59 ranks in the 100th annual percentile. This means puts have been bought to open over calls at a quicker-than-usual clip. The weekly 8/23 207.50-strike put saw a notable rise in open interest over this two-week time frame, and data confirms buy-to-open activity here.

Today, calls are trading at an accelerated pace, though the activity appears to be of the bearish kind. Almost 19,000 HD calls have traded, triple what's typically seen at this point. The weekly 8/23 210-strike call is one of Home Depot's most active options, and it looks like traders may be selling to open positions here. In this case, the call writers either expect HD to remain below $210 through expiration at the close this Friday, Aug. 23, or hope to profit on a post-earnings volatility crush.

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