Home Depot's (NYSE:HD) stock went through a rough patch to start the year. A pullback in January and a bounce followed by a deeper pullback in February led to a higher high. That also completed the bearish Shark harmonic pattern, though, and the stock retraced 50% of the pattern through to mid June.
Since then it has risen back to another new high before a shallower pullback into earnings ahead of Tuesday's U.S. open. The Bollinger Bands® are squeezing ahead of the report, often a precursor to a big move, and the momentum indicators are reversing higher. The RSI held the mid line and is rising while the MACD is flat after a pullback and remains in positive territory.
The past 6 reports have seen the stock price move on average 2.73% or about $3.75 at the current price. That would make for a range of about 133.80 to 141.50. The at-the-money straddle this week suggests a move of about $4.35. Implied volatility is only at 38% compared to longer run volatility at 18% in the September options.
Open interest is large on the put side from the 135 to 133 strikes and then gain at the 130 and 125 strikes. On the call side it is biggest at the 140 strike, but also big at the 130 and 135 strikes. The peaks on the call side are much bigger than the put side as well. Short interest is under 1% on the stock.
For The Long Holder: If you are seeking to protect gains, then a collar is the trade for earnings. An August 137/130 Put Spread ($1.60) protects to the large open interest at 130 below. By also selling the September 23 Expiry 142 Call ($1.19) the out of pocket cost is reduced to 40 cents and still leaves 3% upside before you need to adjust.
For The Speculator: With the largest open interest at 140 above, a speculator could look for a move higher to that level. Using a August 138/140 Call Spread (90 cents) would give a 2.22:1 reward to risk ratio on a move higher. But also selling the August 134 Put (86 cents) lowers toe cost to near zero. To lower the cost without leverage use a 138/140/142 Call Butterfly (37 cents).
For The Investor Who Missed Out: If you missed the run higher and want to be able to buy it on a dip, then an August 136/133 1×2 Put Spread (free) might work for you. This trade gives downside participation from 136 to a maximum payout of $3 at 133. Below that level you will be put the stock with a basis of 130. So as long as it stays over 130 you win. If the stock rises then it cost you nothing and the trade will expire worthless.