On the heels of strong earnings reports in the latest week from Walt Disney (DIS), Shockwave Medical (SWAV) and Celsius (CELH), Home Depot (HD) and Walmart (WMT) headline a busy week of retail earnings. Home Depot stock has been in rally mode ahead of its report due Tuesday before the open.
Home Depot stock has come off lows along with the major stock indexes, but it’s still down 25% year to date compared to a decline of 11% for the S&P 500. Walmart stock also has been in recovery mode after its earnings warning last month.
Other retailers like Lowe’s (LOW), BJ’s Wholesale Club (BJ) and Target (TGT) are also on the earnings docket. Lowe’s held up relatively well Thursday despite a Citi downgrade to neutral. The analyst cited the possibility of an earnings miss and lower-than-expected same-store sales growth, partly because of a slowing housing market.
BJ’s stock is still holding above short-term support levels after a breakout attempt over a 71.34 alternative buy point. But the stock’s relative strength line has been trending lower since mid-July.
Home Depot Stock
In May, Home Depot raised its full-year outlook after reporting a slowdown in earnings and revenue growth. The results handily beat expectations, though, with earnings up 6% to $4.09 a share. Revenue increased 4% to $38.9 billion. Same-store sales increased 2.2%, with U.S. same-store sales up 1.7%.
Customer transactions fell 8.2%, but that was offset by price increases.
At the time, Home Depot forecast full-year sales up 3% with earnings per share growth in the mid-single digits. That was slightly better than prior guidance of “slightly positive” full-year revenue growth, with earnings growth in the low single digits.
For the current quarter, earnings and revenue growth is expected to accelerate from the prior quarter. The Zacks consensus estimate is for adjusted profit of $4.95 a share, up 9% from the year-ago quarter, with revenue up 5% to $43.35 billion.
Other Key Earnings Reports
On Holding (ONON), a provider of premium footwear and sports apparel backed by tennis superstar Roger Federer, has been showing signs of accumulation ahead of its report early Tuesday.
In May, the company reported strong earnings and revenue growth. Q1 profit soared 150% to 5 cents a share. Revenue jumped 72% to $255.4 million.
For the current quarter, the company is expected to report an adjusted loss of 2 cents a share, with revenue up 32% to $249.2 million.
In the technology sector, investors will be watching results from Cisco Systems (CSCO), which reports Wednesday after the close. CSCO stock has also climbed off lows but it’s still more than 25% off its high.
Synopsys (SNPS), a provider of electronic design automation software, still has a relative strength line near highs. It’s at the top of a lengthy consolidation, but after four straight weekly gains, the stock could use a breather. Results are due late Wednesday.
Solar stocks have been leading the market, but the group came under some selling pressure Thursday. Results from Canadian Solar (CSIQ) will be out Thursday before the open.
Options Trading Strategy
A basic options trading strategy around earnings using call options allows you to buy a stock at a predetermined price without taking a lot of risk. Here’s how the options trading strategy works.
First, identify top-rated stocks with a bullish chart. Some might be setting up in sound early-stage bases. Others might already have broken out and are getting support at their 10-week lines for the first time. Some might be trading tightly near highs and refusing to give up much ground. Home Depot stock is still far off highs, but it’s holding gains well. Avoid extended stocks that are too far past proper entry points.
In options trading, a call option is a bullish bet on a stock. Put options are bearish bets. One call option contract gives the holder the right to buy 100 shares of a stock at a specified price, known as the strike price.
Put options are for weak performers with bearish charts. The only difference is that an out-of-the-money strike price is just below the underlying stock price. A put option gives the holder the right to sell 100 shares of a stock at a specified price. You earn profits when the stock falls below the strike price with a put option.
Check Strike Prices
Once you’ve identified some bullish earnings setups for a call option, check strike prices with your online trading platform or at cboe.com. Make sure the option is liquid, with a relatively tight spread between the bid and ask. Look for a strike price just above the underlying stock price (out of the money) and check the premium. The premium ideally should not exceed 4% of the underlying stock price at the time. In some cases, an in-the-money strike price is OK as long as the premium isn’t too expensive.
Choose an expiration date that fits your risk objective. But keep in mind that time is money in the options market. Near-term expiration dates will have cheaper premiums than those further out. Buying time in the options market comes at a higher cost.
This options trading strategy lets you capitalize on a bullish earnings report without taking too much risk. Risk is equal to the cost of the option. If the stock gaps down on earnings, the most that can be lost is the amount paid for the contract.
Put options are for weak performers with bearish charts. The only difference is that an out-of-the-money strike price is just below the underlying stock price.
Home Depot Stock Option Trade
Here’s how a call option trade recently looked for Home Depot.
When shares traded around 311.25, a slightly out-of-the-money weekly call option with a 312.50 strike price (Aug. 26 expiration) came with a premium of around $7.90, or 2.5% of the underlying stock price at the time.
One contract gave the holder the right to buy 100 shares of Home Depot stock at 312.50 per share. The most that could be lost was $790 — the amount paid for the 100-share contract.
When taking the premium paid into account, Home Depot would have to rally past 320.40 for the trade to start making money (312.50 strike price plus $7.90 premium). Keep in mind this is not a trade for a small account because taking delivery of 100 HD shares would cost of $31,250.
Another way to use options ahead of Home Depot’s earnings is with an iron condor trade, which is explained in the Options section.
An option trade for On Holding was a little more pricey. When shares traded around 23.67, an out-of-the-money monthly call option with a 25 strike price (Sept. 16 expiration) offered a premium of $1.35, or 5.7% of the stock price at the time.
Follow Ken Shreve on Twitter @IBD_KShreve for more stock market analysis and insight
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