Home Depot, Inc. (HD) – The
home improvement retailer's shares have been on fire during the most
recent six month period, with the stock last week soaring to $45.50 –
the highest level in nearly a decade – on the heels of a more than 55.0%
rally since August. A sizable ratio put spread initiated on Home Depot
this morning may be the work of an investor hedging a long position in
the shares, or, alternatively, an outright bearish stance looking for
shares to pull back somewhat ahead of May expiration. Home Depot was cut
to ‘Hold' from ‘Buy' at Edward Jones over the weekend and shares in the
name today trade 0.95% lower on the session at $44.09 just before 12:00
p.m. in New York. It looks like the put player purchased around 2,500
puts at the May $42 strike for an average premium of $1.54 each and sold
5,000 puts at the lower May $38 strike at an average premium of $0.72
apiece. Average net premium paid to initiate the ratio spread amounts to
$0.10 per contract, thus implying profits or downside protection kick
in if shares in HD decline 5.0% to breach the effective breakeven point
on the downside at $41.90. Maximum potential profits of $3.90 per
contract are available on the position if the price of the underlying
drops 13.8% from the current price of $44.09 to settle at $38.00 at
expiration. The sale of twice as many of the lower-strike put options
greatly reduces the cost of downside protection, which may insulate a
longer-term HD optimist from losses in the stock's value given the
potential for a broad market correction or disappointing
company-specific news to weigh on the shares ahead of May expiration.
Home Depot is scheduled to report fourth-quarter earnings ahead of the
opening bell on February 21.
Starbucks Corp. (SBUX) – The
specialty coffee retailer's shares hit new all-time highs last week,
but surrendered some of those gains today, slipping 2.0% to $47.19 by
12:40 p.m. At least one options strategist is eyeing the possibility of
further near-term declines in the stock, buying what appears to be a
bear put spread in the front month. The maker of Frappuccinos, Skinny
Mochas and Tazo Chai Tea Lattes reports first-quarter earnings after the
final bell on Thursday. Options players picked up roughly 1,500 puts at
the Feb. $48 strike and sold around the same number of puts at the
lower Feb. $44 strike, all for an average net premium outlay of $1.09
per contract.