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Home Depot (HD) stock was a bearish candidate that came up on one of my Barchart Stock Screeners having broken below the 50-day moving average.
Here are the full parameters for the screener and the results.
Today, we’re going to look at a Bear Call spread trade that assumes HD will struggle to get back above the 50-day moving average in the next few weeks.
A Bear Call spread is a bearish trade that also can benefit from a drop in implied volatility.
The maximum profit for a Bear Call spread is limited to the premium received while the maximum potential loss is also capped. To calculate the maximum loss, take the difference in the strike prices of the long and short options, and subtract the premium received.
HD BEAR CALL SPREAD
To create a Bear Call spread, we sell an out-of-the-money call and then by another call further out-of-the-money.
Selling the July 18 call with a strike price of $360 and buying the $365 call would create a Bear Call spread.
This spread was trading for around $2.15 on Friday. That means a trader selling this spread would receive $215 in option premium and would have a maximum risk of $285.
That represents a 75% return on risk between now and July 18 if HD stock remains below $360.
If HD stock closes above $365 on the expiration date the trade loses the full $285.
The breakeven point for the Bear Call spread is $362.15 which is calculated as $360 plus the $2.15 option premium per contract.
COMPANY DETAILS
The Barchart Technical Opinion rating is a 88% Sell with a Strongest short term outlook on maintaining the current direction.
Long term indicators fully support a continuation of the trend.
The market is approaching oversold territory. Be watchful of a trend reversal.
The Home Depot Inc. is home improvement specialty retailer with retail stores across the globe.
It offers a diverse range of branded and proprietary home improvement items, building materials, lawn and garden products, decor products and related services.
The company operates throughout the United States, Canada and Mexico. It also functions through a network of distribution and fulfillment centers, as well as a number of e-commerce websites.
The company typically serves three primary customer groups: Do-It-Yourself, Do-It-For-Me, Professional Customers.
DIY Customers: These customers are usually homeowners, who prefer purchasing products and completing installations on their own.
DIFM Customers: These customers are usually homeowners, who purchase products on their own and employ third-parties to complete the projects and installations.
Professional Customers: This customer segment mostly comprises professional remodelers, general contractors, repairmen, small business owners, and tradesmen.
Conclusion And Risk Management
One way to set a stop loss for a Bear Call spread is based on the premium received. In this case, we received $215, so we could set a stop loss equal to the premium received, or a loss of around $215.
Another stop loss level could be if the stock broke above $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.
