Massive and Unusual Trading in Home Depot Call Options - Is the HD Stock Rally Over?

Today, a huge and unusual amount of out-of-the-money The Home Depot (HD) call options have traded, as seen in a Barchart report. HD stock has rallied from its recent lows, but could this be a signal that it's over?

HD stock is lower in early trading at $347.97, but it's still up from a recent trough of $318.77 on April 7. However, it's still down significantly from a 3-month peak of $391.05 on Feb. 13.

But has it peaked? After all, the company's Q4 and 2025 earnings were tepid, and management's guidance for 2026 on Feb. 26 was for minimal growth at best.

That might be what some institutional investors have concluded, as seen in today's heavy options trading.

Heavy, Unusual Trading in OTM HD Calls

This is seen in the Barchart Unusual Stock Options Activity Report today. It shows that almost 60x the normal number (i.e., the prior outstanding) of call options have traded in the $370 call option contract expiring in 3 days this Friday (April 24).

That strike price is over 6% higher than today's price. The likely initiator of these trades was an institutional investor who may already own HD stock. They may have been happy to sell the shares at $370, not expecting HD to rise to this point in 3 days. 

The premium received was 25 cents at the midpoint. As a result, the covered call yield for this short-term covered call play was 7 basis points:

  $0.25 / $347.97 = 0.0718%

That's not much, but it shows the low probability that HD stock will rally to $370 by Friday. 

But it's more than nothing. It could be an attractive income play for an institutional investor who already owns the shares and will keep them even if HD drops.

This could be because the stock may not have that much upside.

Tepid Outlook for HD Stock and Its Valuation

For example, last year, The Home Depot produced lower free cash flow (FCF) and FCF margins. This was partly due to fewer weeks in Q4 vs. last year, but that doesn't completely explain the lower numbers.

Moreover, management forecasted that diluted earnings per share (EPS) would not rise more than flat to 4%. However, analysts are not so sanguine. 

For example, the average adjusted EPS estimate of 34 analysts is $15.05. That's just a +2.45% rise over last year's adjusted diluted EPS of $14.69 per share.

Moreover, HD stock is now trading for 23x this EPS forecast (i.e., $347.97/$15.05). This is higher than its 5-year forward P/E average of 22.76x, according to Seeking Alpha.

Similarly, Morningstar reports that the 5-year forward P/E average ratio is just 21.84x.

So, based on these metrics, management's guidance, and analysts' earnings forecasts, HD stock looks overvalued.

Should You Copy This Trade?

That could be why institutional investors have sold out-of-the-money (OTM) calls expiring this Friday. They deem HD stock's rally may falter.

Should you copy this trade? Maybe, but don't forget that HD stock could be volatile.

On the one hand, this play has a 0.0514 delta ratio. That implies there is just over a 5% chance that HD stock will rise to $370 by Friday. So, any income made at that strike price would likely be profitable.

However, if HD stock keeps dropping, the premium will likely depreciate further. And, after all, a 7 basis point income yield is not much. For example, even if this can be repeated each week for a month, the expected return is not much:

  4.33 weeks per month x 0.0718% = 0.31% per month expected return

However, it does make sense for institutional investors. They may be using borrowed money, which leverages the expected return.

However, it's not optimal for most retail investors. There are many opportunities with 1 to 2% monthly yield covered call and short-put play expected returns.

So, on balance, even though HD stock may be slightly overvalued, this play is probably not worth copying for most retail investors.