A couple of weeks ago, amidst the horrible hurricane season, we checked in on Home Depot (HD) stock which had just pulled back from its highs. Our assumption was that that pullback, largely based on Florida’s damage being better than the worst fears, would likely prove temporary and the stock was likely to retest those highs. Here was the trade at the time, from Sept 11th:
HD ($158) Buy the Sept 15 (weekly)/ Oct 160 call calendar for $2,
- sell 1 Sept 15th weekly 160 call at .60 cents
- buy 1 Oct 160 call for 2.60.
It only took a few days for the stock to find its footing and when it was back near the 160 strike we closed the short part of the call calendar and rolled. From Sept 14th:
Update
Buy to close the Sept 160 calls for .20 (for a .40 profit)
Sell to open the Oct 165 calls at .95
New Position: Long the HD (159.35) Oct 160/165 call spread for 1.25 (currently worth 1.75)
Breakeven on Oct expiration – Gains above 161.25 and losses below. Max gain of 3.75 at or above 165. Max loss of 1.25 below 160
The stock has now broken out and is putting in new all time highs. With the stock 163.40 the Oct 160/165 call spread is now worth 3.00 vs the 1.25 currently at risk. It can be worth up to 5.00 if the stock continues higher, and it will be worth 3 or more as long as the stock is above 163 on Oct expiration.
Therefore from a trade management standpoint it makes sense to keep a really tight stop on the trade here and try to patient if it goes higher. I would use 163 in the stock as a stop on the downside (which could happen quickly). The trade would be worth about 10-15c less there but that’s probably worth the risk to try to squeeze more out of this trade as 165 seems within reach. Of course, taking profits now is also an option and no one ever went broke doing that. But for those looking to get the most out of this trade a tight stop is the way to go.