Home Depot Bear Put Spread Could Return 181% in 45 Days

Home Depot (HD) stock was a bearish candidate that came up on one of my screeners for being rated a Strong Sell with a 72% Sell rating.

Today, we’re going to look at a Bear Put spread trade that assumes Home Depot will continue to drop over the next 45 days. 

A Bear Put spread is a bearish trade that also benefits from a rise in implied volatility.

The maximum risk for a Bear Put spread is limited to the premium paid while the maximum potential profit is also capped. 

The maximum profit is equal to the width between the strikes less the premium paid.

Home Depot Bear Call Spread

To create a Bear Put spread, we buy an out-of-the-money put and then sell another put further out-of-the-money.

Buying the October 16th put with a strike price of $310 and selling the $300 put would create a Bear Put spread.

This spread was trading for around $3.55 on Tuesday. That means a trader buying this spread would pay $355 in option premium and would have a maximum profit of $645.

That represents a 181.69% return on risk between now and October 16 if HD stock falls below $300.

If Home Depot stock closes above $310 on the expiration date the trade loses the full $355.

The breakeven point for the Bear Put spread is $306.45 which is calculated as $310 minus the $3.55 option premium per contract.

Company Details

The Barchart Technical Opinion rating is a 72% Sell with a Strengthening short term outlook on maintaining the current direction.

Long term indicators fully support a continuation of the trend.

The Home Depot Inc. is home improvement specialty retailer with retail stores across the globe.

It offers a diverse range of branded and proprietary home improvement items, building materials, lawn and garden products, decor products and related services.

The company operates throughout the United States, Canada and Mexico.

It also functions through a network of distribution and fulfillment centers, as well as a number of e-commerce websites.

The company typically serves three primary customer groups: Do-It-Yourself, Do-It-For-Me, Professional Customers. 

DIY Customers: These customers are usually homeowners, who prefer purchasing products and completing installations on their own.

DIFM Customers: These customers are usually homeowners, who purchase products on their own and employ third-parties to complete the projects and installations.

Professional Customers: This customer segment mostly comprises professional remodelers, general contractors, repairmen, small business owners, and tradesmen.

Conclusion And Risk Management

One way to set a stop loss for a Bear Put spread is based on the premium paid. In this case, we paid $355, so we could set a stop loss equal to the 50% of the premium paid, or a loss of around $175.

Another stop loss level could be if the stock broke above $340.

Please remember that options are risky, and investors can lose 100% of their investment. 

This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.