Goldman Sachs Suggests Pairing LOW and HD Options

Goldman Sachs is out with a research note this morning, where it suggests that traders buy calls on Lowe's Companies (NYSE: LOW) and sell call on Home Depot (NYSE: HD).

Goldman's analysts believe that shares of LOW have the ability to move to the upside around its analyst day next week. Lowe's shares have moved 4.5% on average in the three days around their last six annual analyst meetings, more than three times their average earnings day move.

Additionally, the analysts noted that Lowe's volatility could increase along with their leverage targets. LOW recently raised its targeted leverage ratio to 2.25X from 1.8X, and accepted ratings downgrades in the process, while HD lowered its target from 2.5X to 2.0X, while hiking its dividend and its targeted payout ratio (to 50% from 40%).

Higher leverage could raise volatility for LOW shares even further relative to HD, especially with current global funding concerns.

The analysts suggest buying the LOW Dec2011 $24 call for $0.53 and selling the HD Dec2011 $39 call for $0.98.

Lowe's Companies, Inc. is a home improvement retailer. As of January 28, 2011, the Company operated 1,749 stores, consisted of 1,723 stores across 50 United States and 24 stores in Canada and two in Mexico.

The Home Depot, Inc. is a home improvement retailer. As of January 30, 2010, the company had 2,248 The Home Depot stores located throughout the United States.