Home Depot could rally into earnings, and trader has a way to play it

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Home Depot stock is rallying into its earnings report next week.

The home improvement retailer has added 6% this month, outperforming the S&P 500, which has declined 2% over the same stretch.

“The name is acting incredibly well following the big shakeout, big volatility spike we saw from Covid-19 and is reapproaching all-time highs as we head into earnings,” Todd Gordon, managing director of Ascent Wealth Partners, told CNBC’s “Trading Nation” on Tuesday.

Gordon added that the stock is also holding its ground in the RTH retail ETF alongside mega-cap component Amazon. Home Depot is a 10% holding in that ETF, while Amazon makes up close to 23%.

“Home Depot is actually relatively stronger than the RTH ETF and you can see through 2010, 2011, 2012 all the way up to 2017 that was in fact the case. Since 2017 into 2018 we’ve seen a little bit of a pullback in the ratio, but what you’re seeing is we’re starting to come back towards resistance, and should Home Depot break to new highs, you might actually see that relative strength move higher,” said Gordon.

“That’s actually quite impressive that Home Depot, with the stay-at-home economy, could be showing such good relative strength to this ETF,” said Gordon.

If an investor wants to hold the stock without laying out a lot of capital, Gordon recommends a stock replacement strategy using July options.

“Try to buy an option that has a delta of around 70 if you’re inclined to do the option trade. So the July monthly 220 strike calls have a delta of 71 — basically what that means is if the stock moves higher by $1, your options … will go up 70 cents,” said Gordon.

He says if an investor were to buy 100 calls for roughly $24, they could then hold a position in Home Depot without spending the full amount per share.

“That’s a way to control 100 shares with a much smaller amount of capital. Instead of putting up $23,800, you can go up and put $2400 of capital to control 100 shares of Home Depot if you’d like to do it in the options market,” he said.

Home Depot will report earnings on Tuesday.

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