- Yesterday we previewed 3 big retail earnings The Home Depot (HD), TJ Maxx (TJX) and Dick’s Sporting Goods (DKS). In HD we detailed defined risk longs/ stock alternatives with both stocks near highs, and in DKS, which has beaten up of late, a bearish/ hedge structure.
- With all three reports out and the stocks moving accordingly, let’s check in on the trade ideas. First HD. Here was the trade:
In lieu of 100 shares of HD (157) Buy the May 155/165 call spread for 3.50
- Buy 1 May 155 call for 3.70
- Sell 1 May 165 calls at .20
With the stock at 149.50 this trade is worth about 4.50 or parity. From a risk management standpoint it should be treated just like stock, any profits up or down will be like stock. If the intention was to replace stock with defined risk, it can be turned back into stock at any time by selling now and buying back stock or left to expire at which point it will be exercised. If sticking to the options it makes sense to close the May 165 calls as they’re only a couple of pennies and not worth being short for 3.5 days, just in case.
Next, let’s look at DKS. Here was the trade idea from yesterday:
DKS (48) Buy the June 45 puts for 1.10
With the stock down more than 10%, at 41 these are worth about 4.20 or a 3.10 profit (if bearish outright) or protected (if against stock).
What to do next depends on whether it was against stock. If against stock and still worried about lower lows, it makes sense to roll down, selling the 45 puts and buying the 40 puts. That brings in $3 and books about $2 on the hedge, effectively lowering the cost basis of the shares and leaving protection on for the next month or so.
For those who only needed the hedge for the event, it may be time to look up in the stock and add leverage in case the stock holds and bounces. Right now the June 44/46 1×2 call spread is about 0.15. Buying that as an overlay against beaten up long stock means that a bounces gets supercharged between 44 and 46 in the stock like having twice as many shares. It can add up to 1.85 in additional gains if the stock is above 44. It means being called away if the stock is above 46 on June expiration but at an effective sale of 47.85. This is a good recovery method stock you’re underwater in.
Lastly, let’s look at TJX. Here was the trade idea:
In lieu of 100 shares of TJX (77) Buy the June 75/85 call spread for 3.40
- Buy 1 June 75 call for 3.60
- Sell 1 June 85 call at .20
TJX is down a bit today, with the stock 73.80 the stock replacement/alternative is worth about $1, not great, but less of a loss than the stock saw. As far as trade management, if it was replacing stock it makes sense to maybe sell the call spread and roll down to the June 72.5 call for 2.50 outright. If the stock bounces that will act well, yet if the stock continues lower it will define risk.