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Investors Business Daily
Investors Business Daily
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GAVIN McMASTER

Home Depot Primed For Bounce; How To Capitalize With Options

Home Depot is deeply oversold and holding just above the crucial 200-day moving average.

HD stock is also the second most oversold stock in the Dow Jones Industrial Average behind Johnson & Johnson. The last time Home Depot was this oversold, it went on a multimonth rally.

I'm willing to bet that we get some kind of bounce on Home Depot stock in the next few weeks.

HD Long-Term Bull Put Spread

When it comes to options, we normally look at short-term trades — anywhere from one week to one month. Today, we will look at a longer-term bull put spread.

Longer-term option trades tend to move a little slower than shorter-term trades. That allows more time to adjust or close, but it also means a lower annualized return.

As a reminder, a bull put spread is a defined-risk strategy. So you always know the worst-case scenario in advance.

This type of trade will profit if Home Depot trades sideways or higher and even sometimes if it trades slightly lower.

With HD trading around 333, if we use the Sept. 20 expiration, we can sell a 290 put and buy a 285 to set up the bull put spread. That spread was trading around $0.65 late Wednesday.

Selling this spread would generate roughly $65 in premium, with a maximum risk of $435.

Home Depot Stock Trade Returns 15% In 5 Months

If the spread expires worthless, that would be a 15% return in five months. That's provided Home Depot stock is above 290 at expiration.

The maximum loss would occur if Home Depot closes below 285 on Sept. 20. In that case, it would see the premium seller lose $435 on the trade.

The break-even point for the trade is 289.35. which is calculated as 290 less the $0.65 option premium per contract.

I would set an adjustment point or a stop loss if HD drops below 300. Otherwise, another good rule of thumb is to limit the loss to the amount of premium received. In this case, that's $65.

Sticking to this stop loss level will help avoid large losses if the trade goes south.

According to the IBD Stock Checkup, Home Depot stock is ranked No. 6 in its industry group. It has a Composite Rating of 63, an EPS Rating of 70 and a Relative Strength Rating of 57.

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

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