Home Depot (HD) is above the 20, 50 and 200-day moving averages and only showing an RSI reading of 60.01.
The Barchart Technical Opinion rating is a 100% Buy with a Strengthening short term outlook on maintaining the current direction.
Long term indicators fully support a continuation of the trend.
Rather than just buying the stock, savvy traders can use the options market to find smart ways to trade Home Depot stock without risking too much capital.
Today, we’re going to look at a couple of bull call spread trades on Home Depot stock.
Here are the parameters for finding some bull call spread trade ideas on HD.
- Symbol equals Home Depot
- Break Even Probability above 25%
- Moneyness -10% to 0%
- Days to expiration 60 to 150
Here are the results of that particular screener:
Let’s analyze some of these ideas.
Bull Call Spread 1: May $375 – $380 Bull Call Spread
As a reminder, A bull call spread is a bullish defined risk option strategy. To execute a bull call spread an investor would buy a call option and then sell a further out-of-the-money call.
Let’s use the first line item as an example. This bull call spread trade involves buying the May expiry $375 strike call and selling the $380 strike call.
Buying this spread costs around $2.85 or $285 per contract. That is also the maximum possible loss on the trade. The maximum potential gain can be calculated by taking the spread width, less the premium paid and multiplying by 100. That give us:
5 – 2.85 x 100 = $215.
If we take the maximum gain divided by the maximum loss, we see the trade has a return potential of 75.44%.
The probability of the trade being successful is 46.0%, although this is just an estimate and does not indicate the probability of achieving the maximum profit.
The spread will achieve the maximum profit if HD closes above $380 on May 17. The maximum loss will occur if HD closes below $375 on May 17, which would see the trader lose the $285 premium on the trade.
The breakeven point for the Bull Call Spread is $377.85 which is calculated as $375 plus the $2.85 option premium per contract.
Bull Call Spread 2: June $380 – $390 Bull call Spread
The next example is on the fifth line and involves buying the $380 June 21call and selling the $390 call.
Buying this spread costs around $4.80 or $480 per contract. That is also the maximum possible loss on the trade. The maximum potential gain can be calculated by taking the spread width, less the premium paid and multiplying by 100. That give us:
10 – 4.80 x 100 = $520.
If we take the maximum gain divided by the maximum loss, we see the trade has a return potential of 108.33%.
The probability of the trade being successful is 39.5%, although this is just an estimate and does not indicate the probability of achieving the maximum profit.
Mitigating Risk
With any option trade, it’s important to have a plan in place on how you will manage the trade if it moves against you.
For a bull call spread, setting a stop loss of 50% of the premium paid is a good idea. In the first HD example above, that would be a loss of around $140. For the second example, the stop loss would be around $240.
Traders may also consider a stop loss if HD breaks below the support level around $360.
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.
On the date of publication, Gavin McMaster did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
