Home Depot could be in line for a retail rebound, options traders say

VIDEO2:2502:25
Options traders bet this homebuilder is about to break out

There may be another twist in the tale of two retail stocks on the horizon, according to options traders.

Home Depot and Lowe's have experienced opposite fates recently. The companies – which share ties to both the retail and homebuilder industries – reported earnings within a day of each other last week, and while Home Depot faltered, Lowe's surged higher. Over the past month, the stocks are down 6% and up 6%, respectively.

But as Risk Reversal Advisors co-founder Dan Nathan explained Tuesday on "Fast Money," Home Depot might be about to catch a big break.

"We've talked about a lot of retail earnings over the last couple weeks, and there's been a lot of dispersion in the results," said Nathan. "[Home Depot] was kind of surprising. This stock gapped down from an all-time high on Nov. 19 and kept on going, but today, call volume got really hot. It was three times that of puts."

As Nathan would point out, the most active contracts in Tuesday's session were the Nov. 29 weekly $222.50 calls, which traded for an average of 36 cents. That means these buyers are betting that Home Depot will close the week at least 1% higher than where it closed Tuesday.

This relatively inconspicuous bet might not tell the whole story of how bullish options traders actually are about Home Depot.

Not only has the stock held a one-year uptrend line despite its post-earnings gap lower, but implied volatility is low, meaning that a bet on a 1% move is much cheaper than it normally is for this stock.

"[Implied volatility] came down pretty hard after the earnings. I think once traders feel like the bad news is out of the way, you could see yourself setting up for a play back toward those highs up near $240 if there is good news at that Dec. 11 analyst day, and I would do it playing with defined risk through calls or call spreads," said Nathan.

Home Depot was slightly higher Wednesday morning.

Disclaimer