Update $HD: Closing Feb Put Spread for a Gain

by Dan February 8, 2016 9:40 am • Commentary• Trade Ideas

Last week (on Feb 2nd) we made the case for a near term pullback in shares of The Home Depot (HD), read here, but here is an excerpt:

The company has been one the largest corporate beneficiaries of the U.S Federal Reserve’s unprecedented monetary policy since the crash of the real estate market last decade. But here is the thing, almost every Fed induced bubble is kind of coming apart. And given the horrible poor performance of homebuilding stocks of late (the XHB, the S&P Homebuilders etf is down 25% from its 52 week highs and the ITB, iShares Home Construction etf is down 21% from its 52 week highs), I am hard pressed to think that HD can continue to defy gravity as other sectors in the U.S. that are economically sensitive like autos and transports implode. Yeah the stock has bucked all of the prior head-fakes lower of the last few years, but the broad based weakness in almost every sector in the S&P 500 except for defensive sectors like Utilities, Telco and Consumer staples leads me to believe the jig is near up for U.S. stocks.

The intent was to target HD’s Q4 results expected on Feb 23rd to serve as the catalyst for a pullback to its January lows.  To refresh here was the trade when the stock was $125.60:

Trade: HD ($125.60) Buy Feb 26th weekly 125/115 Put Spread for $2.30

Now with the stock at $113 and below our short strike, our put spread is worth about $7.40 We are going to take our profits and move on.

Action: HD ($113) SELL to CLOSE Feb 26th weekly 125/115 Put Spread at $7.40 for a $5.10 gain

(selling to close 1 Feb 26th weekly 125 put at $12.40 & buy to close 1 Feb26th weekly 115 put for $5)


Rationale:  While there is still more that can be realized from the put spread if the stock were to continue to decline, the risk reward is no longer attractive to stay in it and risk the profits gained with earnings coming before the Feb 26th expiration. We will look at the trade set up again on a bounce prior to Q4 results.