Step 1 of a Longer Term Trade in Home Depot

• Posted by Greg Harmon
• on December 21st, 2015

Home Depot has been a great stock over the last several years. A solid trend higher and then consolidation. Then another trend higher and consolidation. Lather, rinse, repeat as they say. Currently it looks to be in a short term consolidation after pulling out of the longer consolidation in September.

The weekly chart below shows a few salient items. First the momentum is still strong, with the RSI in the bullish range and the MACD leveling but positive. Second, notice that every time the price breaks above the upper Bollinger Band® it has pulled back or consolidated, like it is doing now. It is consolidating for the right reasons. Next, the risk seems to be to the 20 week SMA, currently around 123. Each time it has broken that level it has found support and rebounded.

With these thoughts and a longer term view higher we entered a trade today. It was to buy the stock and to add a collar as protection into February options expiration, or for the next 2 months. We bought a February 130/120 Put Spread and sold a March 140 Covered Call against the stock for $1. This gives protection down to 120 should the stock consolidation turn into a pullback. And allows 7% upside until March without making any adjustments.

This is Step 1. Step 2 will come in the future and I cannot tell you what it will be now. It might be selling the Put Spread to monetize the hedge. It might be rolling the March 140 Covered Calls out to June and up to the 150 Strike. Or it might be something completely different. Stay tuned.

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Still time before Christmas. Contact me at greg@dragonflycap.com and use the code SANTA in the message to get either an annual subscription for $556 (10% off) or an annual subscription plus my book signed for $600.

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