Trading Home Depot around Hurricane Irene: Post-Mortem

On Friday, I outlined a few HD options strategies to profit from the weekend super-storm Hurricane Irene (The Perfect Storm: Trading Home Depot around Hurricane Irene).  Today (Monday 8/29 11:30AM EST), the storm has passed. As expected, implied volatility in HD has collapsed back to it's historical average (32.5%). Let's take a look at how the various recommended strategies fared.

"For long-term HD shareholders: Sell out-of-the-money calls, like the Sept 35 Calls for .70.  By selling out-of-the-moneys, you won't run afoul of the IRS and won't owe any taxes on the underlying shares unless they're exercised. If they're called away, you'll have benefited from this week's 7% gain,  plus .85 appreciation (2.5%), plus .70 options premium (2%). Total profit since last Friday: 11.5%. Profit from today: 4.5%. Not bad in a low-return world. You can also buy back the calls on Monday, after volatility collapses, if you're married to the stock."

Sept 35 Calls are now at .46 (IV is now 31%). Close the position for .24 profit (34% on the options or .7% on the underlying).

"For short-term HD shareholders: Sell slightly in-the-money calls, like the Sept 33 Calls for 1.85.  This gives you a .70 (2%) premium in a pretty sleepy stock, and it can drop nearly 4% before your protection runs out.  Of course, you're giving up any upside if Irene is even worse than expected, and HD adds to it's already impressive run.  Still, you will benefit from collapsing IV."

Sept 33 Calls are now at 1.45 (IV is 34.7%,  time premium is .45).  Close the position for a .40 profit (24% on the options, or 1.2% on the underlying).

"For non-directional options traders: Sell high-IV options, and protect yourself with lower IV options. For example, sell the Sept 30 Puts for .27 (IV=50%) and buy the Nov 30 Puts for .97 (IV=40%) for a net debit of .70. Cover early next week for a small profit as IV collapses. Even bigger bump if HD fades."

Sept 30 Puts now .21 (IV=47.44%), Nov 30 Puts now .90 (IV=38.72%). Spread is now .69, basically break-even with Friday's spread of .70. Not worth the trouble.

"For bullish options traders: Sell high-IV puts. For example, sell the Sept 32 Puts for .54 (IV=41%). If HD rallies next week, pocket the .54. If it drops, you can buy it 9.4% cheaper if it falls through 32 (your breakeven is 31.46, 10% below today's price). Don't be afraid of selling naked puts! It's a very conservative strategy; Warren Buffet uses it to buy companies he likes at a discount, and generate income to boot."

Sept 32 Puts now at .47 (IV=38.5%). Close the trade for .07 profit (13%). Probably not worth it, on a risk-adjusted basis.

"For bearish options traders: Sell high-IV calls, like the Sept 33 Calls for 1.80 (IV=38%). If HD drops next week, pocket the .65 risk premium, plus whatever the drop is, to a max profit of 1.80 at 33 or below. If it rallies into expiration, your effective short price is 2% higher than today's price."

Sept 33 Calls are now at 1.45 (IV is 34.7%,  time premium is .45).  Close the position for a .40 profit (24%).

"For neutral options traders: Sell at-the-money puts and calls.  Sell Sept 34 puts for 1.10, Sell Sept 34 calls for 1.13. (HD now at 34.30). Trade is a winner if HD closes between 31.77 and 36.23 on 9/16. Or, exit the trade early next week. Seems like a nice risk/reward here as premium covers +/-6.5% move in 3 weeks."

Sept 34 Calls at .86 (IV=32.67%), Sept 34 Puts at 1.15 (IV=33.2%). Close the combination for a .22 profit (10%).

Of course, you can also let the trade run, either for a few more days as damage estimates are fine-tuned, or even all the way to expiration. The advantage to the last approach is you save money on commissions and "slippage", and the result may fit your overall portfolio strategy.

Conclusion: 4 wins, 0 losses, 2 ties. Not too bad! To re-emphasize the most important point from the original post, never go long options into an approaching natural disaster! Everybody knows it's coming, but nobody knows how bad the damage will be. You will be paying a high price to gamble on Mother Nature, as premiums will be inflated. Those premiums are sure to return to their baseline when the event has passed.
Tweet