Home Depot’s Earnings: A Look at Historical Straddle Performance

Is a HD Earnings Straddle Worth A Look?

As Home Depot (HD) gears up to announce its earnings before the market opens on May 14, 2024, we analyze the options straddle—a popular options strategy among traders anticipating the earnings stock move. This analysis aims to determine whether positioning with this strategy to capitalize on actual stock movements has historically yielded significant returns.

HD Historical Implied Moves vs Actual Earnings Moves Chart

Source: Market Chameleon

In the accompanying chart, the blue brackets around the 0% line represent the implied move in either direction for each of the past 12 quarters, as implied by the straddle price before the earnings release. Overlaid on these brackets, colored bars indicate the actual stock movement: green bars signify an upward move, while red bars denote a downward move. If a colored bar extends beyond its corresponding bracket, it indicates that the actual move exceeded the expected range; conversely, if a bar falls within the bracket, the actual move was less than expected.

HD Historical Earnings Straddle Price

Implied +/-4.4%  Moveon Average

The earnings straddle, a strategy involving buying both a call and a put at the same strike price, essentially reflects the market’s expectations of how much the stock price might swing on earnings announcement.

In the last 12 quarters, the straddle for Home Depot was priced to imply a +/-4.4% stock move.

Historical Actual Earnings Stock Move

Averaged +/-  3.5%

Comparing the implied movements with actual outcomes helps measure the accuracy of the straddle prices. Following the earnings announcement, the actual stock price movements averaged a 3.5% change in either direction.

This comparison shows that historically, the straddle has slightly overestimated the potential movement of Home Depot’s stock.

Difference Between Implied and Actual

0.9% Differential

On average, the straddle overestimated the stock’s movements by 0.9%, with the options estimating greater volatility than what actually occurred 58% of the time.

This discrepancy suggests that the options market has tended to expect more dramatic reactions than what has unfolded, impacting the pricing strategies of options traders.

Straddle 1-Day Performance

Averaged +2%

Source: Market Chameleon

Historical Earnings Option Strategy Performance for HD

Despite the straddle often overpricing the expected movement, its performance one day after earnings has shown an average gain of 2%. This counterintuitive result can be attributed to the generally low pricing of the straddle.

Even when the stock moved less than expected, the relatively low cost of the straddle meant that there wasn’t a significant premium loss, and some time decay still contributed positively to its value.

Conclusion

The analysis of Home Depot’s historical earnings straddle reveals a tendency to overestimate market movements. However, the typically low premium priced before earnings has meant that selling the straddle resulted in losses in the longer term, as there was not much premium to diminish in the event of a minor stock move.

This suggests that for the upcoming earnings, while the straddle may again overestimate the move, cautious optimism might be warranted for those considering this strategy, given the past patterns of actual market behavior versus expectations.

Key Takeaways

The earnings straddle for HD has historically overpriced the expected market move by about 0.9%.
Despite overestimating volatility, straddles have managed a positive return due to low initial pricing.
Traders should consider the history of overestimation but also note the limited downside due to low premiums when setting up their positions for the upcoming earnings.

—

Originally Posted May 9, 2024 – Home Depot’s Earnings: A Look at Historical Straddle Performance

NOTE: Stock and option trading involves risk that may not be suitable for all investors. Examples contained within this report are simulated And may have limitations. Average returns and occurrences are calculated from snapshots of market mid-point prices And were Not actually executed, so they do not reflect actual trades, fees, or execution costs. This report is for informational purposes only, and is not intended to be a recommendation to buy or sell any security. Neither Market Chameleon nor any other party makes warranties regarding results from its usage. Past performance does not guarantee future results. Please consult a financial advisor before executing any trades. You can read more about option risks and characteristics at theocc.com.

The information is provided for informational purposes only and should not be construed as investment advice. All stock price information is provided and transmitted as received from independent third-party data sources. The Information should only be used as a starting point for doing additional independent research in order to allow you to form your own opinion regarding investments and trading strategies. The Company does not guarantee the accuracy, completeness or timeliness of the Information.