Put Option Volume Growing on Retailer

07/10/2012 8:00 am EST


Andrea Kramer

Associate Editor, Schaeffer's Investment Research, Inc.

Andrea Kramer of Schaeffer’s Research highlights some interesting option trading volume in a big home improvement retailer.

The shares of Home Depot (HD) have spent the last few weeks dancing beneath resistance in the $53 region, which has emerged as a speed bump in the equity’s quest for multi-year highs.

Against this backdrop, put volume ramped up on Friday, with speculators either betting on a short-term pullback for HD, or buying options "insurance" to cover their long stock position ahead of earnings next month. Here is a recent daily chart:

Click to Enlarge

By the closing bell, HD saw roughly 17,000 puts cross the tape, compared to its average daily volume of about 13,000 puts. Meanwhile, fewer than 10,000 HD calls changed hands.

Garnering the most attention was the security’s out-of-the-money August 49 put, which saw close to 10,800 contracts traded—mostly at the ask price, suggesting they were bought. Plus, put open interest at the back-month strike soared by more than 10,200 contracts over the weekend, confirming our suspicions of fresh initiations.

As alluded to earlier, the put buyer’s goal is either to capitalize on the stock’s breach of the $49 level within the next several weeks, or to protect shares of HD. If it’s the latter, the shareholders are hoping for HD to extend its long-term uptrend, but have guaranteed the least they receive for their HD stake is $49 a share, should the stock retreat within the option’s lifetime—which encompasses HD’s turn in the earnings spotlight on August 14.

Widening our sentiment scope, we find that short-term options players are already more put-heavy than usual at the moment. In fact, the stock’s Schaeffer’s put/call open interest ratio (SOIR)—which measures options expiring within three months—currently rests at 1.36, above 72% of all other readings of the past year.

Elsewhere, short interest skyrocketed 27.4% during the most recent reporting period. Nevertheless, these pessimistic positions still account for less than 2% of HD’s total available float, suggesting the bearish bandwagon is far from crowded. In the same vein, 15 out of 23 analysts deem HD worthy of a "buy" or better rating, with not a single "sell" suggestion in sight.

Andrea Kramer can be found at Schaeffer’s Research.

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