Housing starts are down nearly 18% from a year ago and there has been a negative trend in housing starts in the months leading up to September 2006. ( realtor.org ) Both the long and short-term housing start trends are forecasted to decrease. Analysts predict this is good news for landlords and bad news for homeowners and renters.
It may also spell bad news for Home Depot (HD). Third-quarter sales at the home improvement giant were down 3.1%. Many analysts are also expecting it to get worse. The Atlanta-based company recently lowered its financial forecast for the entire coming year.
Home Depot also announced it would only experience 12% growth in 2006 vice the previously reported figures of 14% to 17%. It is also thought shares might have recently been buoyed by Home Depot’s share repurchase program; the company bought back 24 million shares in the last quarter.
Home Depot expects single-digit negative growth in the fourth quarter of this year. Another statistic casting Home Depot in a negative light is their inventory is up nearly 14% from one year ago to nearly $14 billion. To top off the Home Depot bad news its rival Lowe’s (LOW) forecasts for the coming year are not as gloomy as Home Depot’s.
Has this negativity already been priced into the Home Depot stock? Perhaps. The stock price increased over 4% on Tuesday, and the P/E is floating around 12. It still does not seem like a stretch to assume Home Depot’s stock price will be stagnate or decrease in the near term. This leaves us to explore a bearish strategy for options expiring in December of 2006.
Using PowerOptions’ StrategySearch summary tool will help us identify the best way to exploit the situation for financial advantage. Selecting the bearish strategies bear call credit spreads, bear put debit spreads and covered put yields the following available positions for December of 2006:
| Bear-Call Credit Spreads – HOME DEPOT INC (HD) $37.74 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Sell Option |
Month &Strike |
Bid Price |
Buy Option |
Month &Strike |
Ask Price |
%Return | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| HDLU | 06 DEC 37.50 | $1.00 | HDLH | 06 DEC 40.00 | $0.20 | 47.10% | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| HDLU | 06 DEC 37.50 | $1.00 | HDLV | 06 DEC 42.50 | $0.05 | 23.50% | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| HDLH | 06 DEC 40.00 | $0.10 | HDLV | 06 DEC 42.50 | $0.05 | 2.00% | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| HDLH | 06 DEC 40.00 | $0.10 | HDLI | 06 DEC 45.00 | $0.05 | 1.00% | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Bear-Put Debit Spreads – HOME DEPOT INC (HD) $37.74 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Sell Option |
Month &Strike |
Bid Price |
Buy Option |
Month &Strike |
Ask Price |
%Return | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| HDXG | 06 DEC 35.00 | $0.15 | HDXU | 06 DEC 37.50 | $0.80 | 284.60% | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| HDXG | 06 DEC 35.00 | $0.15 | HDXH | 06 DEC 40.00 | $2.45 | 117.40% | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| HDXU | 06 DEC 37.50 | $0.75 | HDXH | 06 DEC 40.00 | $2.45 | 47.10% | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| HDXU | 06 DEC 37.50 | $0.75 | HDXV | 06 DEC 42.50 | $4.90 | 20.50% | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Covered Puts – HOME DEPOT INC (HD) $37.74 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Sell Option |
Expire &Strike |
Option Bid |
Upside Protection |
%Return Assigned |
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| HDXG | 06 DEC 35.00 | $0.15 | 0.40% | 7.70% | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| HDXU | 06 DEC 37.50 | $0.75 | 2.00% | 2.70% | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| HDXH | 06 DEC 40.00 | $2.40 | 6.40% | 0.40% | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
For the bear call credit spreads strategy, all of the positions either don’t provide enough upside protection or don’t provide enough return for the warranted risk so we’ll pass on the bear call credit spreads positions. For the bear put debit spreads strategy, all of the positions don’t provide enough upside protection, so we’ll stay away from the bear put debit spreads positions. For the covered put strategy, the second position has a potential return of 2.7% with an upside protection of 2%, not bad for a 31 day investment. It should be noted the covered put strategy requires shorting the underlying stock, so the maximum loss is unlimited.
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PowerOptions provides Internet based tools for analyzing stock options with specific search criteria and for finding potentially lucrative option income. For those seeking to execute a bear call credit spreads, bear put debit spreads and/or covered puts investment strategy for their personal portfolios, PowerOptions provides an Internet based search engine for finding potentially lucrative income producing stock options positions.
PowerOptions’ sister company PowerOptionsApplied provides expert stock option trading recommendations. PowerOptionsApplied specializes in covered calls, iron condor and selling naked puts stock options strategy recommendations. PowerOptionsApplied provides a 30-day risk free trial of its service.
[tags]HD, Home Depot Inc., LOW, Lowes Cos Inc., bear call credit spreads, bear put debit spreads, covered put strategy, investment strategy, iron condor, option income, poweroptions, selling naked puts, stock option trading, stock options[/tags]