Home Depot showed impressive strength on Friday and closed near the high of the day. Home Depot stock also recently bounced off the 200-day moving average.
The company is ranked No. 6 in its group and has a Composite Rating of 94, an EPS Rating of 88 and a Relative Strength Rating of 89.
Investors who think Home Depot stock will stay above the 200-day moving average for the next week or two could look at a short-term bull put spread.
To execute a bull put spread, an investor would sell an out-of-the-money put and then buy a further out-of-the-money put.
Selling the February-expiring 345-strike put and buying the 340 put would create a bull put spread.
This spread was trading on Friday for around $0.75. That means a trader selling this spread would receive $75 in option premium for a block of 100 shares and would have a maximum risk of $425.
Potential Of 17% Return In Three Weeks
That represents a 17% return on risk between now and Feb. 18 if HD stock remains above 345.
If Home Depot stock closes below 340 on the expiration date, the trade loses the full $425.
The break-even point for the bull put spread is 344.25, which is calculated as 345 less the 0.75 option premium per contract.
This bull put spread trade has a delta of 4, which means it is a similar exposure to owning four shares of Home Depot, although this exposure will change over time as the stock price moves.
In terms of a stop loss, if the spread increased in price from $0.75 to $1.50, I would consider closing early for a loss.
With earnings due Feb. 22, this trade should have no earnings risk unless Home Depot gives early guidance.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ
