Looking at Home Depot to remodel my portfolio

• Posted by Greg Harmon
• on July 27th, 2015

I was at Home Depot over the weekend when I wandered into aisle 3, Portfolio. Bet you did not know Home Depot even had a portfolio aisle. Well, just past the 401k’s, IRA’s and Mutual Funds was something interesting. A promotion for their own stock. Normally I might look at the generic brand as inferior, but I took a closer look.

The chart below got me thinking of the potential benefits of adding Home Depot stock ($HD) to my portfolio. This stock had a nice run higher from the 80 level in August 2014 to a high just under 120 in February. Since then it has pulled back in a rather shallow channel. The top side has been a falling resistance line with a bit more variability on the downside moves.

What is intriguing about this chart is how it has not take part in the bigger swings of the broad market as it moves sideways. It also still well above the 200 day SMA. The momentum indicators are mixed, with the RSI still bullish but the MACD crossed down. but the MACD has been broadly trending higher since the beginning of May.

I have drawn an AB=CD pattern on this to show approximately where it could project to over time. This assumes a pullback to the 200 day SMA at some point soon. But from there a (or here) a move higher over 116 would look towards 150. The company pays a 2.36% dividend yield which gets me to consider it now, despite the reporting date of August 18th. I

I want to buy this with protection for earnings and allow for long term upside. To do so I am buying the stock and then adding a August 111/106 Put Spread for protection and selling a September 4 Expiry 117 Covered Call to fund it. The total Collar cost is 2 cents, and gives protection between 111 and 106 for the earnings report and up tot that point. It also allows for upside to 117 without an adjustment. This leaves less than $2 downside exposure to the stock until earnings.

Actual trade executions:

Stock $112.91 debit
Put Spread $1.06 debit
Covered Call $1.04 credit

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