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.
Consult the profit/loss graph I built below using my
OptionsHouse
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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.