Set Up a Pairs Trade With Lowe's and Home Depot

Should this scenario play out in the next five months, you would realize a gain of $418 ($32.58 - $25 - $3.40) on the Home Depot call plus profit of $190 ($40 + $3.90 - $42) on the Lowe's call for a total profit of $608 per pair. Had you paired 100 shares of Lowe's and 100 shares of Home Depot, the profit would have been only $458. That's because you would make a profit of $758 on the long position in Home Depot's stock ($32.58 - $25), but lose $300 on the Lowe's short position ($42 - $39).

Of course it may not play out that way at all; Lowe's shares may continue to run away from Home Depot's, in which case you have unlimited risk whether you've paired up using either options or stock. But that's why they call it speculating.