DEC 2020: HD $260- $265 Bull Call Spread
Stock
HD
Trade Structure
$260- $265 Call Spread
Trade Date
12/07/2020
Price Paid
$250
Expiration Days
01/15/2020
THIS IS A DELAYED TRADE FOR EDUCATIONAL PURPOSES ONLY.
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Trade Rationale
HD $260- $265 Call Spread - Home Depot beat earnings and initially rose to $278. But dropped significantly on no real news. In fact the only real news that happened around the time of the drop was an analyst upgrade with a revised target of $320. I can only attribute this exaggerated downwards move to profit-taking. But my job is not to discuss why this happened. My job is to find trades when the correct setup shows up. In this case the exaggerated downward move is unwarranted and unsustainable. And we got a very nice opportunity to enter a trade at a well-established support level.
Trade Selection Criteria
Overall market movement
There is no extreme movement in Nasdaq. This was a post-earnings trade, so the regular market indicators are not as relevant. I have talked about these trades in the second edition of my book.
No Earnings or Significant News
Earnings are behind us and were announced on 11/17
Bollinger Bands outside Keltner Channels
Bollinger bands are clearly outside the Keltner Channels.
RSI Analysis
RSI is flat and inconclusive
ADX Analysis
ADX is flattish, but DI- is clearly showing signs that this downward momentum may have lost its legs.
Trade Analysis
HD initially dropped a little as what usually happens with all mean reversion trades. It then got stuck in a sideways pattern. We still ended up making a full 94% profit on our money invested. The beauty of debit spreads is that you can double your money for a small $5 move in the underlying stock!
Trade Outcome
WINNER
Profit/Loss
$235
Beginning Account Balance
$8,600
Ending Account Balance
$9,700
