HD Earnings: High Probability Bull Put Spread Trade

Home Depot (HD) is home improvement specialty retailer with retail stores across the globe. It offers a diverse range of branded and proprietary home improvement items, building materials, lawn and garden products, decor products and related services.

The company operates throughout the United States, Canada and Mexico.

It also functions through a network of distribution and fulfillment centers, as well as a number of e-commerce websites.

The company typically serves three primary customer groups: Do-It-Yourself, Do-It-For-Me, Professional Customers.

DIY Customers: These customers are usually homeowners, who prefer purchasing products and completing installations on their own.

DIFM Customers: These customers are usually homeowners, who purchase products on their own and employ third-parties to complete the projects and installations.

Professional Customers: This customer segment mostly comprises professional remodelers, general contractors, repairmen, small business owners, and tradesmen.

Home Depot has stayed above the expected range following all of the last six earnings announcements.

HD Earnings Bull Put Spread

With earnings set for November 12th before the market open, implied volatility on HD stock is through the roof.

Implied volatility is sitting at 31.58% compared to a twelve-month low of 15.12% and a high of 40.62%.

That means, it’s a great time to be an option seller.

If you have a bullish outlook for Home Depot for their earnings announcement, then a bull put spread is a great strategy to employ.

To execute a bull put spread, an investor would sell a naked put and then buy a further out-of-the-money put to create a spread.

A bull put spread is considered less risky than a naked put, because the losses are capped thanks to the bought put.

Potential Benefits

Bull put spreads offer several advantages for options traders seeking to generate income while managing risk. 

They provide a defined-risk strategy, allowing traders to know their maximum potential loss upfront. 

Additionally, bull put spreads benefit from time decay, as they profit from the erosion of extrinsic value over time. 

This time decay accelerates as the expiration date approaches.

Bull put spreads will benefit from the drop in implied volatility that always occurs after an earnings announcement. 

Potential Risks

While bull put spreads offer enticing benefits, they also come with inherent risks. 

One significant risk is the potential for substantial losses if the underlying stock's price declines sharply. 

Traders must also consider the possibility of early assignment, which can occur if the stock price moves below the short put option's strike price before expiration. 

It's essential for traders to thoroughly understand and manage these risks when implementing this options strategy.

Selling an HD Bull Put Spread

A trader selling the November 15th, $375-strike put and buying the $370-strike put on HD would receive around $90 into their account, and would have a maximum risk of $410. 

That represents a 21.95% return on risk between now and November 15th if HD stock remains above $375.

If HD stock closes below $370 on the expiration date the trade loses the full $410.

The breakeven point for the bull put spread is $374.10 which is calculated as $375 less the $0.90 option premium per contract.

Company Details

The Barchart Technical Opinion rating is a 72% Buy with a strengthening short-term outlook on maintaining the current direction.

Long term indicators fully support a continuation of the trend.

Of the 35 analysts covering HD, 25 have a Strong Buy rating, 1 has a Moderate Buy rating and 9 have a Hold rating.

Conclusion

Selling a bull put spread on HD ahead of earnings can offer traders an opportunity to capitalize on anticipated bullish sentiment while managing downside risk. 

By carefully selecting strike prices and expiration dates, traders can position themselves to potentially profit from a favorable earnings outcome while limiting potential losses. 

However, it's crucial for traders to conduct thorough analysis and adhere to risk management principles to navigate the inherent uncertainties associated with earnings events.

Please remember that options are risky, and investors can lose 100% of their investment. 

This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.

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On the date of publication, Gavin McMaster did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.