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Trader bets on more upside for Dow component Home Depot

In a week of big box retail earnings, one familiar homebuilder name stands out to Optimize Advisor's Mike Khouw.

Home Depot is set to report earnings before the bell on Tuesday with an implied move of 3 percent in either direction. The home retailer has fallen almost 8 percent since hitting its year-to-date high in early August, but a recent rally has given Khouw renewed hope for the holding.

"Home Depot has been outperforming lows in a couple of key areas," Khouw said Friday on CNBC's "Options Action." "It's also trading at a relatively cheap valuation compared to how it has historically, about 10 percent cheaper depending on which metric you're looking at, which I think makes it kind of attractive."

To bet on a rise in Home Depot, Khouw wants to use a "call spread risk reversal" to account for a Home Depot rally. Looking out to January expiration, Khouw wants to sell the 120-strike puts for $1.10, buy the 130-strike calls at $3, and then sell the 135-strike calls for $1.15. Altogether, the total net cost of Khouw's trade is 75 cents.

"You get to capitalize on an upside move here and you're not risking a lot of money to do it," said Khouw.

Home Depot was off by more than 1.5 percent on Monday and is down 3 percent year to date. It is also a key component of the homebuilders ETF XHB, down 2 percent this year.

Other big box retailers reporting this week include Lowe's, reporting before the bell on Wednesday, and Wal-Mart, reporting before the bell on Thursday. Both have also rallied this month after falling from their summer highs.

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