Home Depot stock looks incredibly strong at the moment and just bounced off the 21-day exponential moving average two days ago.
One way to take a bullish exposure without risking too much capital is via a bull call spread. This might be a good trade in the current market.
A bull call spread is created through buying a call and then selling a further out-of-the-money call.
Selling the further out-of-the-money call reduces the cost of the trade but also limits the upside.
Going out to the June expiration, a 380-strike call option was trading around $14.20, and the 390 call was around $9.70 late Tuesday. That leaves a premium paid of $4.50, or $450.
Max Potential Return $550
Buying the 380 call and selling the 390 call would create a bull call spread. The maximum loss would be $450. The maximum potential profit would be $550 (the difference in strike prices, multiplied by 100 less the premium paid).
A bull call spread is a risk-defined strategy. So if Home Depot stock closes below 380 on June 21, the most the trade could lose is the roughly $450 premium paid.
Potential gains are also capped once the stock goes to 390. So no matter how high HD stock might go, the most the trade could profit is $550.
The break-even price for the trade is equal to the long call strike plus the premium, which in this case would equal 384.50.
When To Close Home Depot Stock Trade
In terms of trade management, if the stock dropped below 360, I would consider closing early for a loss.
According to the IBD Stock Checkup, Home Depot stock is ranked No. 3 in its industry group. It has a Composite Rating of 77, an EPS Rating of 70 and a Relative Strength Rating of 80.
Home Depot is due to report earnings in early March, so this trade would have earnings risk if held until then.
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 X/Twitter at @OptiontradinIQ
