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How traders are cashing in on Home Depot

Options Action: Home Depot earnings preview

Home Depot is showing improvement, and traders are cashing in.

The company's shares jumped about 3 percent Tuesday, after the home improvement retailer reported better-than-expected sales growth in its second-quarter earnings and raised its full-year guidance.

On Monday, Home Depot call options volume was three times put options volume, indicating bullish sentiment among traders.

In one of the biggest single transactions, a trader bought 4,000 September 125-strike calls for $1. As of 11 a.m. Eastern time Tuesday, Home Depot call options traded at $1.50, which means the trader has made $200,000 so far on his trade.

"Options were really, really cheap heading into this. This tells me investors were very complacent," Dan Nathan of RiskReversal.com said Monday.

Home Depot credited its stronger sales and growth partly to the recovering U.S. housing market.

Read MoreRecovery in US housing market drives Home Depot sales beat.

Retail stocks are the best-performing industry group in the S&P 500, but some of Home Depot's brick-and-mortar peers such as Staples and Gap have struggled this year, down 22 percent and 17 percent year to date, respectively.

Wal-Mart also reported quarterly earnings Tuesday, and missed analyst expectations. The company's stock fell 3 percent and is down more than 18 percent for the year.