Unusual Options Activity In Home Depot $HD

| April 20, 2015 | 0 Comments

HD OptionsAs many of you know, unusual options activity can be a valuable indicator as to what traders are thinking, and more importantly, where these stocks are heading in the short-term.

This is something professional options traders pay a lot of attention to, and for good reason…  Unusual options activity can “tip off” big moves in a stock, either up or down.

So let’s take a look at some ‘interesting’ activity that caught our eye this week…

Home Depot $HD, as everyone likely knows, is a massive home improvement retailer.  Chances are you live near a Home Depot or shopped at one in recent years.  Check here for more info on the business.

$HD is up 9% so far for the year.  The current share price of $112.10 is just 5% from the 52-week high and 52% above the 52-week low.

So what does unusual options activity in $HD tell us?

$HD has had a strong year so far.  As the economy improves and people buy, upgrade, or repair homes, the stores see more and more business.

However, $HD shares have also traded sideways since mid-February.  The stock has tried a few times and failed to break 52-week highs.

Here’s the deal…

A trader purchased 5,000 May 115 calls, while simultaneously selling 10,000 May 120 calls.  This trade costs a total of $1.08, or just over a half million dollars.  Remember, any spread where there’s a cash outlay is called a debit spread.

This trade makes money if $HD closes above $116.08 by expiration but not above $120.  You see, with the 120 strike being sold twice as much, the spread has unlimited risk to the upside.  This type of trade is also called a ratio spread.

So why do a ratio spread when risk is unlimited? 

First, selling twice the amount of calls against the long strike significantly lowers the cost of the spread.  Moreover, $HD is not the type of stock likely to blow through the high strike in a month’s time.  The trader clearly believes there’s a limit on how high the stock could go.

Here’s the chart of $HD:

unusual option activity, a chart of $HD

As you can see from the chart, $HD has had a great run this year.  The stock just recently crossed below the 50-day moving average after sitting above it for quite some time.

The ratio spread trader doesn’t appear to be worried about downside risk despite the breach of the 50-day support.  Remember, the stock only has to climb a few dollars for this trade to be profitable.

More Options Trading Ideas…

Keep in mind, there’s a lot more unusual options activity going on than what we discuss here.

We just try to bring you what we feel are the most significant ones– and the ones you might actually be able to make some money on!

Yours in Profit,

Gordon Lewis

Note:  Gordon Lewis has been trading options for more than 15 years and he now writes and edits for Optionstradingresearch.com.  You can sign up for the newsletter and get a free research report.  We are your go-to source for top notch options trading research.

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Category: Unusual Options Trading Activity

About the Author ()

Gordon Lewis is the Chief Investment Strategist and editor for the popular daily newsletter – Options Trading Research. He’s also editor of our dynamic theme-based options trading service, Advanced Options Adviser, and one of the key analysts behind the highly successful Options Trading Wire.