Have Homebuilders Found A home at Current Levels? Option Traders Say Yes

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  • On Tuesday, new home sales declined 4.4% on a monthly basis in February while January was upwardly revised to the highest print since June 2007. Quite a dichotomy as you consider that the ramp up in COVID-19 fears and closures really didn’t pick up until March. The question is which extreme is correct going forward? The decline the number of hedge funds holding DR Horton , Inc. (DHI) at the end of the fourth quarter seemed to indicate that the tide of bullishness may have been turning, but these stocks have been battered without much data.

    The iShares U.S. Home Construction ETF (ITB) opened higher on Tuesday as stimulus hopes and Fed easing caused shorts to cover. Shortly after the market opened, there were sizeable bullish option trades being made that are looking for a near-term rally in homebuilders.

    Option traders sold 2000 contracts of the 27 MAR 20 $28 puts that have three days to expiration. The close to $1.80 in premium per share can be used by traders to help buy long calls, if bullish. The premium was potentially used to purchase 3000 call option contracts for the 15 MAY 20 expiration at the $30 strike price for around $0.90 a share. If the stock expires about $28 on Friday, that allows the call option to be held risk free.

    Action to Take: While the option activity is pointing to a near-term rally in ITB, the more bearish underlying fundamentals will likely come back. The potential near-term target for ITB is $35.

    If you’re looking for leverage, you may consider buying the 15 MAY 20 $30 call for around $1.60 a share. If the price rises to $135 by expiration, the option will be worth $500 a contract and a profit of $340, or 212%, will be realized.

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