Home Depot Inc (HD) Stock Offers a Trade for Free DIY Equity

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As a homeowner, I am a fan of Home Depot Inc (NYSE: HD ) stores. Somehow, I find myself making several trips a month to my local store. I am also impressed with HD's management. They seem to know how to extract the most of their clients' potential. Even though I get better customer support at Lowe's Companies, Inc. (NYSE: LOW ), I prefer shopping at Home Depot for the serious projects.

Why Home Depot Inc (HD) Stock Is a Worthy Buy ... At a Cheaper Price

Source: Mike Mozart via Flickr (Modified)

Fundamentally, HD stock managed to thrive as the U.S. exited the worst real-estate downturn in recent history.

HD Stock Movement

Technically the HD stock price has been chopping about but in a really wide range. Home Depot is currently atop a three month old 15% rally that erased a huge dip which started last August. It still looks constructive to me.

Usually, I am not one to chase big rallies late, especially when they make all-time highs. But in this case, I will take a lotto ticket into HD stock.

Click to Enlarge Last week, the manner by which Home Depot stock breached the roof may invite more momentum buyers to set even higher highs. I will use the Home Depot options market and risk a little to capture the better part of the next $5 rally.

The Bet: Buy HD March $140/$145 debit call spread. This is a bullish trade for which I pay $1.80 per contract to open. This is my maximum potential risk. If Home Depot rallies past my spread, I stand to double my money.

Usually I like to hedge my bets by selling risk to reduce my out-of-pocket expense. But in this case, I will defer this for a few days. What I see in the open interest tells me that the rally could face some resistance through this week. Nevertheless, here is the trade I would add to my bullish bias.

The Hedge (optional): So if HD dips a little, I would then sell Aug $110 put and collect about $1 per contract. This is a bullish trade with a 20% buffer from current price and a 90% theoretical chance of success. I only sell naked puts if I am willing and able to own the stock at the strike sold.

I can modify the sold put into a credit put spread to better suit a more conservative taste.

The Twist (optional): Sell HD Aug $115/$110 credit put spreads. For this I collect 35 cents to open. The buffer here is a little smaller than the naked put sold but still carries a potential 8% yield on money risked.

If Home Depot stock stays above my sold strikes, then I would have eliminated my debit call spread entry price. If so, then any premium I recapture by selling the debit call spread would be pure profit. I do need to note that the upcoming HD earnings could add temporary pressure as they add a binary effect independent of real fundamentals.

I am not required to hold my positions into expiration. I can close any of them at any time for partial gains or losses.

Nicolas Chahine is the managing director of . As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernic and stocktwits at @racernic .

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

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

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