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October 25, 2013  Fri 12:21 PM CT

HD: SEE CHART GET CHAIN FIND STRATEGIES
Traders are selling puts in Home Depot for the second day in a row, betting that it will hold current levels as the homebuilding sector shows signs of revival.

More than 20,800 HD options trade today, again outpacing its daily average for the last month. Much of the action is in one print in the November Weekly 75 puts.

optionMONSTER systems show that a trader sold 12,000 of those contracts for $0.26, below the listed bid price. This is clearly a new position, as previous open interest in the strike was just 594 contracts.

These short puts are looking for HD to remain above $75 through expiration at the end of next week. If it falls below that level, the trader will face the obligation to buy shares. (See our Education section)

This follows put selling yesterday at the 76 strike in the options that expire at the end of today's session. Our scanners also found winning trades in October calls recently.

HD is down 0.86 percent to $76.12 in afternoon trading and was below $75 on Wednesday. The home-improvement giant has been trading in a tight range for the last month but is now trying to retake its 100-day moving average.

At the same time, homebuilders are trying to make a comeback from their recent slump. The iShares U.S. Home Construction ETF has been climbing in recent weeks and yesterday broke above its 200-day moving average. Our researchLAB market-analysis tool shows that homebuilders are up about 5.5 percent in the last week.
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Education & Strategy

Sweet Spot Exceptions

As discussed last week, when using the Stock Replacement Strategy to replace a stock position to trade direction, we want to use an option that has very similar characteristics to the stock. We talked about using the deep in-the-money, 80 to 85 delta option that is similar in the Greeks and has relatively little extrinsic value which tends to work against us in stock directional trading.

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