Home Depot wowed Wall Street on Tuesday, and now at least one trader stands to make a lot of money after betting on the stock's direction.
The home improvement mega-retailer beat analysts' expectations on its revenues, profits and same-store sales. It also upped its full-year earnings guidance. Home Depot's stock soared during Tuesday's pre-market trading, trading more than $2 above its previous closing price of $114.33.
The options market was particularly bullish on the stock on Monday. Bullish bets on Home Depot outnumbered bearish ones by a ratio of 4-to-1. And one trade now seems quite prescient.
Specifically, 6,500 contracts of the weekly May 116-strike calls were traded for a price of about 85 cents each. Since each contract controls 100 shares, more than $550,000 was wagered that Home Depot shares would close above $116.85, or 2 percent higher than Monday's close. A call is a bullish bet allowing purchasers to buy a stock at a set price within a specific time frame.
According to options expert Mike Khouw, the choice of the 116-strike calls may not have been just a coincidence. "This stock has typically moved about 2.8 percent on earnings," he explained. "That's how much the stock would need to go higher for these calls to be profitable."
But taking a position on underlying shares would have been a bit more expensive for someone looking to take a short-term bullish position in Home Depot, Khouw added. Those calls have not yet to pay off as the post-earnings collapse in volatility has decreased the value of those options. The whole trade offers a stark reminder of how difficult it can be to make short-term long volatility bets.
Still, the name could hold long-term value.
"This stock has had excellent EPS growth fueled largely by the buyback, by wider margins and by good top-line growth," Khouw said. "It is trading at slightly above-average multiple and that might be the reason people would use calls instead of the stock to make their bullish bet. "
Home Depot is trading at 21 times its next 12 months' expected earnings compared to the 's multiple of 17, according to data compiled by FactSet. Chief rival Lowes also trades at about 17 times forward earnings.
In February, Home Depot announced an $18 billion share buyback. That's on top of the $53 billion in total share repurchases the company has made since 2002.