The Home Depot (NYSE: HD) shares are trying to find their way today as investors digest Federal Reserve Chair Ben Bernanke's testimony on the state of the economy before the Senate Banking Committee. Investors are worried that inflation and weakness in credit markets will continue to drag down the economy and were less than impressed by this morning's PPI numbers. If you think this stock won't be rising too far in the coming months, then it could be a good time to look at a bearish hedged play on HD.After hitting a one-year high of $40.75 last July, the stock has hit a new one-year low today. This morning, HD opened at $21.39. So far today the stock has hit a low of $20.76 and a high of $21.69. As of 12:10, HD is trading at $21.47, down $0.06 (-0.3%). The chart for HD looks bearish and steady, while S&P gives the stock a positive 4 STARS (out of 5) buy rating.
For a bearish hedged play on this stock, I would consider a November bear-call credit spread above the $27.50 range. A bear-call credit spread is an options position that combines the purchase and sale of call options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make an 11.1% return in four months as long as HD is below $27.50 at November expiration. Home Depot would have to rise by more than 26% before we would start to lose money. Learn more about this type of trade here.
HD hasn't been above $27.50 since early June and has shown resistance around $23 recently. This trade could be risky if the company's earnings (due out on 8/19) are a positive surprise, but even if that happens, this position could be protected by resistance HD might find at its 200 day moving average, which is currently around $28 and falling.
Brent Archer is an options analyst and writer at Investors Observer. DISCLOSURE: Mr. Archer owns and/or controls diversified portfolios of long and short stock and option positions that may include holdings in companies he writes about. At publication time, Brent neither owns nor controls positions in HD.
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