Home Depot Options Bears Bank a Quick Profit

Subscribers to Schaeffer's Overnight Trader service doubled their money earlier this month on Home Depot Inc (NYSE:HD) August 155 puts. Here's a closer look at why HD stock came across our radar, and how the bearish options trade played out.

We initially recommended the Home Depot puts on Wednesday, Aug. 16, when the stock was trading around $152.63 -- just having breached its 50-day moving average, a former layer of support that appeared ready to work as a resistance going forward. Plus, the $152-$153 level had been a floor in the second quarter, but more recently served as ceiling. 

There also appeared to excessive optimism priced into the shares, considering the stock had sold off sharply in the session prior to our put recommendation, even after the home improvement retailer reported better-than-expected second-quarter earnings. Supporting this theory was the fact HD shares were upgraded at Raymond James in the aftermath of this weak post-earnings price action, which left the security at risk for bigger losses.

Another indicator that caught our attention was HD's Schaeffer's Volatility Index (SVI), which was ranked in the 27th annual percentile after earnings. In other words, low volatility expectations were being priced into the stock's short-term options, making it an attractive time to buy premium. 

As expected, Home Depot's technical troubles worsened on Thursday, Aug. 17, as fellow Dow stocks Wal-Mart and Cisco sold off after earnings -- prompting us to close half our bearish position. We closed the remaining half ahead of expiration on Friday, Aug. 18, when the stock was trading around $147.54, locking in a total profit of 127% in just two days' time.