What Option Traders Know About Homebuilder Stocks

09/23/2010 12:01 am EST


Steven Place

Founder, InvestingWithOptions.com

After a strong market run like the one we’ve seen over the past few weeks, it’s a good idea to look at sectors that haven’t participated because they might play catch up. These set-ups will offer traders better risk management than names that are very extended.

The homebuilders and related stocks seem to be in that sort of scenario. Let’s first take a look at the SPDR Series Trust SPDR Homebuilder ETF (XHB):

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It has been deeply oversold and has been putting in a base over the past month. If it clears and holds above 16, we could see the start of an intermediate-term uptrend. There have also been some good earnings reports—Toll Brothers (TOL) actually posted a profit, and Lennar (LEN) actually beat estimates.

Now, do note that XHB isn’t what you think! Its holdings include many retail names such as Tempurpedic (TPX), Home Depot (HD), and Aarons (AAN). As @zortrades (on Twitter) mentioned on Chart.ly TV earlier this week, many of these “Second derivative housing” plays may offer you better beta as the actual homebuilders don’t move that fast.
However, there has been some very interesting options action in some of these names.

On September 17, Louisiana-Pacific Corporation (LPX) saw a large buy order of 12,500 November 9 calls bought on the offer. This may seem bullish, but it was tied to short stock—so either someone was converting their stock to calls or they were initiating a short + call overbuy. Whichever is the case, it indicates that a trader is expecting a very large move coming for LPX, most likely to the upside due to the gamma offered by the calls.

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We also saw a bullish bet on KB Homes (KBH) this past Friday. A trader put on a bull call spread in size, buying the January 14 call and selling the January 16 call for about a .35 debit.

The size of this trade was around 10k, so the trader is betting that KBH will appreciate 14% by January expiration. This chart also looks ready to go:

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So if this is another rally that no one believes in, a few of these names could be worth considering going into October. Proper risk management and position sizing will determine the winners and losers in this game, so make sure to trade your plan!

By Steven Place, option trader and blogger, InvestingWithOptions.com

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