Volatility bet boosts Home Depot (HD) options volume

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Shares of Home Depot Inc. (NYSE: HD ) are swinging to the upside during Wednesday's trading session, and it looks like one option investor is willing to bet on declining implied volatility and expressed that bet by selling a straddle in the August expiration month.

Home improvement names such as HD have experienced strength this week, with the Atlanta-based company up roughly 42 cents, or more than 1%, to $34.41 so far on the day. HD did not announce any news today, and has remained relatively quiet since its earnings announcement on May 18 (the company announced earnings of 45 cents a share, which bested estimates by five cents). Heavy put and call volume on the tape today suggests at least one investor expects minimal moves in the stock during the next few months.

By noon EST, more than 5,000 August 35-strike calls and puts had traded thanks to an investor who sold this straddle for a premium of roughly $3.87 per spread. The out-of-the-money ( OTM ) August 35 calls crossed the tape for $1.55 per contract, which was closer to the bid price at the time of the trade. The in-the-money August 35 puts changed hands for $2.32 per contract, which was also closer to the bid price when the trade hit the tape. Current open interest of the calls is 21,000 contracts and the puts are home to current open interest of 1,100 contracts. It's possible that some of the volume in the August 35 calls was initiated to close, but it looks like the straddle seller traded the options to open on a bet that HD shares could be range bound during the next three months.

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If HD shares are trading between $31.13 to the downside and $38.87 to the upside at August options expiration, this straddle seller could make a maximum profit of the credit collected, or $3.87 per contract. Maximum loss if HD shares drop below the lower-breakeven price is significant but limited until the unlikely event that the stock reaches zero. On the flip side, the investor could theoretically incur unlimited losses if the stock soars higher than the upper-breakeven price.

Implied volatility of the HD August 35 calls and puts is roughly 28% compared to the stock's 30-day historical volatility of 31%. The straddle selling action we saw today suggests investors expect volatility to come in even more throughout the near-term. With the rally we are seeing in the market today, we are seeing investors take more risk, and selling straddles is one way that they do that.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Options

Referenced Stocks: HD , OTM

Jud Pyle

Jud Pyle

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