Home Depot (HD) lower on more housing troubles

19 12 2007

Home Depot (HD) lower on more housing troubles

Posted by: in Housing

Filed under: Earnings reports, Bad news, Industry, Home Depot (HD), Options, Technical Analysis, Housing

Home Depot, Inc (NYSE: HD) stock is falling this morning on news that the number of foreclosure filings surged 68% nationwide compared with the same month last year. Analysts also said that they’re expecting another spike in foreclosures in early 2008. The news, combined with Hovnanian Enterprises (NYSE: HOV) report of a bad quarter, is weighing down the home improvement retailer. If you think this stock won’t be rising too far in the coming months, then it could be a good time to look at a bearish hedged play on HD.

After hitting a one-year high of $42.01 in February, the stock hit a one-year low of $25.57 yesterday, which it may threaten today. This morning, HD opened at $26.43. So far today the stock has hit a low of $25.84 and a high of $26.43. As of 11:25, HD is trading at $26.07, down $0.40 (-1.5%). The chart for HD looks neutral and improving, while S&P gives the stock a positive 4 STARS (out of 5) buy rating.

For a bearish hedged play on this stock, I would think about a February bear-call credit spread above the $30 range. A bear-call credit spread is an options position that combines the purchase and sale of call options to hedge risk in case the stock doesn’t do what you think but still leverage nice returns. For this particular trade, we will make an 8.7% return in 2 months as long as HD is below $30 at February expiration. Home Depot would have to rise by more than 15% before we would begin to lose money.

HD hasn’t been above $30 since October and shown resistance around $29 recently. This trade could be risky if the housing situation starts to turn around, but even if that happens, this position could be protected by resistance the stock might find around $30, where it topped out in early December.

Brent Archer is an options analyst and writer at Investors Observer. DISCLOSURE: Mr. Archer owns and/or controls diversified portfolios of long and short stock and option positions that might include holdings in companies he writes about. At publication time, Brent neither owns nor controls positions in HD or HOV.