Home Depot stock has been one of the best post financial crisis performers up 225% over the last five years versus the Dow Index plus 93% over the same period. The stock is trading approximately at $77 right at the midpoint of the ten month channel from $82 to $72. An upside breakout above the range resistance targets $92 which is 20% above the current price.
A stock substitution strategy using options ties up less capital and has absolutely limited risk to the premium paid. An option instead of buying the shares also has greater staying power for long term trend development. A Home Depot call option can provide the staying power in a potential bullish trend extension.
Trade Setup
I recommend the HD Aug $67.50 Call at $10.50 or less. A close in the stock below $72 on a weekly basis or the loss of half of the option premium would trigger an exit. The Delta on the $67.50 strike call is 81%. The August has nearly more than six months for bullish development. This option is like being long the stock from $67.50 with limited risk.
The maximum loss is limited to the $1050 or less paid per option contract, with a stop at $525. The upside, on the other hand, is unlimited.
The HD option trade break even is $78 or less at expiration ($67.50 strike plus $10.50 or less option premium). That stands one dollar higher than the current trade. If shares hit the $92 price target the option would be worth near $23 for an 115% return on investment.
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