Trade Update $HD: Spreading Dec Puts in Front Of Q3 Earnings in the AM

by Dan November 18, 2013 3:17 pm • Commentary

Tomorrow morning before the opening HD reports their Q3 results. The options market is implying about a 2.8% one day move vs the 4 qtr avg of about 3.25% and the 8 qtr avg of about 2.5% (see our preview here).

A little more than a month ago I bought a Nov/Dec 75 Put Calendar when the stock was $76.54 (see below) with the thought that the weakness in homebuilders would eventually extend to the home improvement sector.  Interestingly HD had been a big laggard as the SPX seemingly made new highs daily since the interim resolution to the Govt shutdown and debt ceiling situation.  The trade that I had on was a nice winner and was setting up as a great situation to spread into tomorrow mornings results, until last week’s rip to $80.  The 10 day chart (immediately below)  shows the quick turn:

HD 10 day chart from Bloomberg
HD 10 day chart from Bloomberg

While the one year chart below shows the stock basing above technical support, holding the uptrend and sitting right on its 200 day moving average to ripping in a straight line to technical resistance at $80:

HD 1yr chart from Bloomberg
HD 1yr chart from Bloomberg


SO WHAT TO DO NOW??  Here was the original trade from Oct 11th:

TRADE:  HD ($76.54) Bought Nov / Dec 75 Put Calendar for 1.20

Now with the stock $79.75 and the Nov 75 put expired worthless on Friday’s’s close, I am now just long the Dec 75 put which is worth about .60, half of what I paid for the Calendar.  I can either:

1. close for a loss,

2. leave as is, but with my break-even at $73.80, the put seems a bit like a lotto ticket,

3. close existing put and roll up strikes, this would involve lots of bid/ask and commissions or

4. I can spread and look to reduce my break-even a  bit.

With a month to expiration, I am going to spread the puts as there is plenty of time to get back to even on a few % move lower, and I am going to sell the Dec 72.50 Put as it seems like free money with the stock near $80 and vol likely to come in 20 -25% after earnings. So this sale protects against that collapse in the 75’s without having to close the positions for a loss beforehand.

ACTION: Sell to Open 1 HD ($79.75) Dec 72.50 Put at .30
New Position: Long HD ($79.75) Dec 75 / 72.50 Put Spread for .90

To be fair, this is not the trade that I would initiate now into earnings if I were bearish, But I am trying to make do with what I have.




Original Post Oct 11th, 2013:  New Trade $HD: Home Improvement Trend Closer To The Beginning or the End of A Cycle?

HD as been a monster ytd, a posterchild for all the FOMC’s hardwork over the last few years.  But since the May/June “TaperTantrum” HD has not kept pace with the SPX, and failed to come close to making a new high last month with every major index.  Obviously higher rates are weighing a bit on the housing trade, and as Business Insider succinctly pointed out this morning (here), JPM and WFC Q3 results don’t speak to an uptick in applications or originations, from JPM release, per BI:

Mortgage origination were $40.5 billion, down 14% from the prior year and 17% from the prior quarter, including purchase originations of $20.0 billion, up 57% from the prior year and 15% from the prior quarter.

Additionally, mortgage application volume was down 45% from the prior year and 38% from the prior quarter.

The Technical set up for HD is not horrible but the stock is forming a bit of a triangle that is likely to be resolved some time fairly soon.  The lack of momentum of late is a bit troubling, highlighted by its declining 50 day moving average (purple line below) and the series of lower highs since May.

HD 1 yr chart from Bloomberg
HD 1 yr chart from Bloomberg

The stock’s strength today is clearing bucking the trend of broad retail weakness, but my sense is that rates will continue to stay bid, regardless of Yellen’s appointment to be the next Fed Chairwoman, and that a continuation of the government shutdown will weigh on consumer confidence all adding up to softening activity in the housing market.  But the BULL CASE is predicated on the notion that there remains a tremendous backlog of home improvement that does not rely on new and used home purchases.  This is not a trend that I would want to be short in the long run, but like the idea of setting up to own Dec near the money Puts for their Q3 results expected Nov 19th.

TRADE:  HD ($76.54) Bought Nov / Dec 75 Put Calendar for 1.20

-Sold 1 Nov 75 Put at 1.10

-Bought 1 Dec 75 Put for 2.30

Break-Even on Nov Expiration:

Profits are maximized at $75. Slight moves above and below that strike are also profitable with big moves higher or lower putting the structure at risk of losses on expiration.

-Maximum risk is 1.20

Trade Rationale:  Despite IV coming in this week across the board, single stock IV remains high, this structure helps finance owning the downside puts for the event that will fall in Dec expiration.