Upgrade Can't Push Home Depot Options

Kind words from an analyst lead to mixed trading in the home retailer. Plus, traders may have seen the National Semi jump coming.
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Options trading in

Home Depot

(HD) - Get Report

threw off some odd signals during Wednesday's session, particularly since

Schroder Wertheim

upgraded the stock in the morning along with

Lowe's

(LOW) - Get Report

.

John Harris, the analyst with Schroder, raised his price target for Home Depot from the mid-60s to the low- to mid-70s over the next 12 months. "You buy these stocks on dips; they are high-quality core holdings." (Schroder hasn't done underwriting work for either Home Depot or Lowe's.)

Upgrade or not, shares of Home Depot stayed stubbornly low, down 1 to 58 1/4, as the retail group got smacked around on Wednesday. The May 50 puts on Home Depot, meanwhile, gained 3/16 ($18.75) to 3/8 ($37.50) on volume of just over 1,000 contracts against open interest of 1,257 contracts.

"I don't know what to think about this," said one Philadelphia-based trader. "The way the price is acting, if there was a customer selling, who the heck was bidding?"

Meanwhile, there was little confusion among gold bugs. Options on mining stocks finally caught the fire sweeping the metals stocks, with call options in

Barrick Gold

(ABX)

gaining ground for several months out. Most active, though, were the October 22 1/2 and October 25 calls, which gained 3/8 ($37.50) to 2 11/16 ($268.75) and 5/16 ($31.25) to 1 5/8 ($162.50), respectively. Volume in both was over 1,000 contracts.

Barrick Gold stock gained 1 3/16 to 22 3/16 after the company hiked its semiannual dividend to 10 cents a share from 9 cents for shareholders of record as of May 31.

Lastly, a lesson in options trading from

National Semiconductor

(NSM)

, shares of which in recent days had made "a strong technical move by closing above 14," wrote Larry McMillan in a recent

McMillan Analysis

research note. "Stock volume patterns were improving, and implied volatility has inflated suddenly."

The idea is that higher volatility represents a footprint on the trail. If there is news to come, the options market will account for it with changes in volatility, and naturally the options price will factor that in.

As it turned out, the spike in volatility was coming from traders playing on an upcoming announcement. National Semiconductor said today it will exit the personal-computer microprocessor business. In addition,

BancBoston Robertson Stephens

analyst Arun Veerappan upgraded the stock to a buy from a long-term attractive.

National Semi stock rose 2 3/16 to 16 13/16 on Wednesday.

The volatility for National Semi's May options was about 80 at the end of April, but climbed to nearly 120 last week. That compares with historical volatility of 66.

To wit: May 15 calls on Tuesday closed at 1 3/8 ($137.50). By midday today, they were trading up 1 1/8 ($112.50) to 2 1/2 ($250). Often in these situations, volatility explodes in the days preceding some kind of event and then gets crushed on "the fact." That premium would have spiked based on the stock move, but as traders sold the May 15s they likely bought yesterday, the volatility readings came back into double-digit territory.

This time, to the pleasure of Tuesday's call buyers, the appreciation on National Semi's options was enough to make their 11th hour speculation rather profitable.