Home Depot (HD) recently rallied back above the 21-day exponential moving average as well as the 50-day simple moving average. That’s bullish. So, Home Depot stock could be setting up for another run at its all-time high of 345.69.
For a megacap play, HD has a reasonable profile with a Composite Rating of 80, an EPS Rating of 94, and a Relative Strength Rating of 49. The RS Rating is low, but it has shown improvement in the last two weeks.
Traders thinking Home Depot stock might head higher in the next month could look at a bullish calendar spread. This trade involves selling a short-term option and buying a longer-term option with the same strike price.
Traders with a price target of, say, 340 could place the bullish calendar spread at that price.
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Home Depot Stock: Setting Up The Calendar Spread
Selling the Aug. 6-expiring call option with a 340 strike price will generate around $135 in premium. Plus, buying the Aug. 20 340 call will cost around $290. That results in a net cost for the trade of $155 per spread, and that is the most the trade can lose.
The estimated maximum profit is around $430, but that can vary depending on changes in implied volatility. The idea with the trade? If HD stock trades up to around 340, the calendar spread will increase, resulting in a net profit.
You can view a bullish calendar spread as a good way to gain some upside exposure on a stock without risking too much if the move doesn’t work out.
The ideal scenario? A rise up to 340 around August 6 with little change in implied volatility.
Home Depot is due to report earnings on Aug. 17, so I would close this trade before then if I did not want exposure to the upcoming news.
Micron Technology (MU) is another stock that may be considered for this bullish option strategy. The 52-week high for MU stock is 96.96. The stock is currently trading around 80.
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 Twitter at @OptiontradinIQ
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