BOOKED: 86% Profit, and… Home Depot Meets the Wrecking Ball (HD, KAI)

We open today with a walk to the bank, a ginormous sum in hand.

It comes courtesy of our Kadant Inc. trade, from The Batflu Hammer Drops on The Credulous.

That dispatch arrived at your inbox on April 5^th, recommending you buy the KAI October 15^th 195 PUT for 28 and sell the KAI October 15^th 180 CALL for 18.  Total debit on the affair was $10.

And today?

The PUT sells for $28.10 and the CALL goes for $9.50.

Sell the former and buy back the latter, and you rake in $18.60 on $10.00 laid out.

That’s 86% in just six weeks.

And that’s better than any discordant songfest you got.

Home Wrecker!

We’re moving today on Home Depot Inc. (NYSE:HD), retailers of “building materials, home improvement products, lawn and garden and decor products,” according to their literature.

The company’s stock rose like a meteor during the Batflu era (nearly 150%), but her recent technical deterioration is now on par with that of the Alam Bridge in Baltistan (ah, those youthful days in the Gilgit Gorge…).

Don’t pay the ferryman…!

Anyway, the stock is a pure short at this stage.

But before we entertain you with her chart, have a gander first at the stock’s fundamentals –

• HD shares carry a P/E of 26,
• Offer a Dividend Yield of 2.08%,
• A Price to Book ratio that’s a naked shame at 102.18 (!), and
• And a Debt to Equity ratio at an extraordinary 11.29 (long term D/E is 10.86).

Yes, the company’s making money, but not enough to justify current fundamentals – or price levels.

In fact, she reported earnings Tuesday, easily beat estimates, yet still the stock slid.

Here’s the chart –

The technical breakdown is as follows –

1. RSI registered a lengthy overbought condition in April, (boxed in red, at bottom), after which
2. Both RSI and MACD began diverging against price, a sign that bullish momentum was slowing (in purple).
3. In the last week, RSI has gone sub-waterline (in green), triggering a rash of selling that will only accelerate once MACD confirms with her own sub-waterline read.
4. Price has shown major technical weakness three times over the last month – first, when a seven week trend channel was broken (in red, at top); then, when a subsequent rising wedge failed (also in red); and finally, yesterday, when final support at 315 cracked (in blue).
5. From a weekly perspective, a large bearish engulfing pattern emerged last week, that speaks directly to coming weakness (in black).

Taken together, it all points to big trouble for the big box builder machers.

And that’s why we’re acting.

Like this –

A Jew and His Gold recommends you consider selling the HD September 17^th 305/320 CALL spread for $6.90 (21.40/14.50) and buying the HD September 17^th 320/300 PUT spread for $10.40 (23.05/12.65).  Total debit on the trade is $3.50.

Rationale:  Tight spreads help us structure the trade nicely, and offer a very generous payout if it succeeds.

Essentially, we’re fronting $3.50 to take in (net) $16.50.  That’s our maximum profit.

Maximum loss is $18.50 (difference between the short CALL strikes plus initial debit).

That scenario (the bad one) plays out if HD shoots above 320 by expiry – an eventuality we can’t see occurring, at least not in the near term, given all the poison now ingested by the market.  And, indeed, it’s over the near term that we plan to close the trade.

Current price is 314.45.  Breakeven arrives at $310.75 – just 1.1% below last night’s close.

Setup is great.

Let G-d decide.

In love and war, we wish you –

Many happy returns,

Matt McAbby

Follow @HughLOHaynew