For those thinking the housing slump will continue to drag down retailers like Home Depot and Lowes, this blog is for you. Lowe’s reported today sales are trending lower than forecast and the company is likely to have numbers at the low end of its announced spectrum.
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Audio Podcast:
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Home Depot announced last week it would be closing 11 Landscape Supply stores and several Home Expo stores. The company was clear in saying it would not be closing any stores or reducing its workforce as part of the drawdown. Home Depot CEO Frank Blake said he would be increasing the company’s sales force rather than reducing it. In an AP interview, Blake said, “We’re making investments notwithstanding the downturn. I think that’s absolutely the right thing to do. It’s going to lead to long-term success.”Also in the news today is word of existing home sales being at a five year low. According to the National Association of Realtors, home sales dropped 4.3% in August. The statistics are interesting as there has been a doubling in the national existing homes in the inventory, yet there has been no widespread sales price reduction. It seems plausible the inventory can only swell for so long before there is a price correction. It may hinge on sellers tolerance to keep their homes on the market.
Because market watchers have widely noted a correlation between home sales and the profitability of home improvement stores such as Lowe’s and Home Depot, the position we will adopt for the potential trades section of the blog is a bearish one.
Potential Trades:
The following trades are bear call credit spreads on Home Depot and Lowe’s. We also threw Countrywide (CFC) and Hovnanian (HOV) in the trading mix. We have covered these lending stocks frequently from a bearish perspective and though it would show more options if we included them today in the search.
| Bear Call Credit Spreads – Poor Home Sales and Profits | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Symbol | Last Price |
Sell Option |
Expire Info |
Bid |
Buy Option |
Expire Info |
Ask |
Pot Ret % |
Net Cred |
Break Even |
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| LOW | $28.93 | LOWKF | 07 NOV 30.0 (53) | $0.95 | LOWKZ | 07 NOV 32.5 (53) | $0.35 | 31.6 | $0.60 | $30.60 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| CFC | $17.96 | CFCKD | 07 NOV 20.0 (53) | $1.05 | CFCKX | 07 NOV 22.5 (53) | $0.55 | 25 | $0.50 | $20.50 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| HD | $33.07 | HDKG | 07 NOV 35.0 (53) | $0.85 | HDKU | 07 NOV 37.5 (53) | $0.35 | 25 | $0.50 | $35.50 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| HOV | $10.66 | HOVKV | 07 NOV 12.5 (53) | $1.05 | HOVKC | 07 NOV 15.0 (53) | $0.55 | 25 | $0.50 | $13.00 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| CFC | $17.96 | CFCKD | 07 NOV 20.0 (53) | $1.05 | CFCKE | 07 NOV 25.0 (53) | $0.25 | 19 | $0.80 | $20.80 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| HOV | $10.66 | HOVKV | 07 NOV 12.5 (53) | $1.05 | HOVKW | 07 NOV 17.5 (53) | $0.30 | 17.6 | $0.75 | $13.25 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| HD | $33.07 | HDKG | 07 NOV 35.0 (53) | $0.85 | HDKH | 07 NOV 40.0 (53) | $0.15 | 16.3 | $0.70 | $35.70 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| LOW | $28.93 | LOWJF | 07 OCT 30.0 (25) | $0.45 | LOWJZ | 07 OCT 32.5 (25) | $0.15 | 13.6 | $0.30 | $30.30 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
All of the potential trades shown are for the month of November with the exception of the final Lowe’s trade which is for the month of October. All of these trades should be entered into with caution because the ‘real’ potential profit per trade is less than $100. Even if the trade goes as predicted, brokerage fees can quickly erode the potential profit.
Also, bear call credit spreads can result in a significant loss. The loss has a limit, but this is something each investor should consider before entering the position.
If this is too risky, another option is covered puts. In the case of a covered put, the potential loss is infinite (if the stock were to take off). This is often hedged by purchasing out-of-the-money call options to cover an upward stock movement.
Competitors:
Competitors for LOW include: The Home Depot, Inc (HD), Menard, Inc. (private), Sears, Roebuck and Co. (private), and Interline Brands Inc. (IBI).
Competitors for CFC include: Bank of America Corporation (BAC), Wells Fargo & Co. (WFC), Fremont General Corp. (FMT), Indy Mac Bancorp (IMB), NovaStar Financial Inc. (NFI), Ocwen Financial Corp. (OCN), and PHH Corp. (PHH).
Competitors for HD include: Lowe’s Companies Inc. (LOW), Menard, Inc. (private), True Value Company (private), SCP Pool Corp. (POOL), and Tractor Supply Co. (TSCO).
Competitors for HOV include: DR Horton Inc. (DHI), Lennar Corp. (LEN), Pulte Homes Inc. (PHM), and Toll Brothers Inc. (TOL).
For more information about how to identify and research great option trades, visit the PowerOptions website. There you will find the data you need to make quick, clear, and informed decisions. You can trade knowing you have found the best investment. Also, PowerOptions will allow you, with a few quick clicks, to quickly and accurately compare trades. PowerOptions‘ premium customer support is second to none in the industry. They can be easily contacted when you need them at their toll-free number to answer customer questions. Call them now toll free at 877-992-7971.
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[tags] Menard, Inc., Sears, Roebuck and Co., True Value Company, BAC, BankAmerica Corp., CFC, Countrywide Financial Corp., DHI, D.R. Horton Inc., FMT, Fremont General Corp., HD, Home Depot Inc., HOV, Hovnanian Enterprises Inc., IBI, Interline Brands Inc., IMB, Indy Mac Bancorp, LEN, Lennar Corp., LOW, Lowes Cos Inc., NFI, NovaStar Financial Inc., OCN, Ocwen Financial Corp., TOL, Toll Brothers Inc., TSCO, Tractor Supply Co., WFC, Wells Fargo & Co., bear call credit spreads, covered call investment strategy, investment strategy, poweroptions [/tags]