The Contrary Investing Report
Investing and Trading News, with a Contrarian, Sarcastic Twist!


Playing the US Housing Rebound via the Homebuilders

by Brett on August 30, 2012

The stabilization and surprising recent strength of the US housing market is starting to make the headlines – but if you’ve been following the charts of the homebuilders, the latest “good news” is no surprise to you.

Homebuilder ETF ITB broke out to three-year highs earlier in 2012, and the uptrend remains in place, with the 10-day moving average leading the 20-day EMA:

Homebuilder Index ETF ITBThe recovery in US housing was foretold in advance by ITB. (via StockCharts.com)

Earlier this morning on Bloomberg, a trader recommended going long homebuilders on pullbacks.  His recommended strategy for doing so was to sell puts against Toll Brothers (TOL).

TOL stock price chart 2012

An even stronger uptrend in Toll Brothers (TOL). (via StockCharts.com)

The 17.00 October puts on ITB (currently at 17.97) are trading at 0.60.  So you could pickup $60 per contract (100 shares worth) over the next 52 days with this approach, and be obligated to buy ITB below 17.00, at an actual cost basis of 16.40 after you back out the income from selling the put.

If I recall correctly, the Bloomberg options guy recommended selling the 30.00 puts on TOL.  Premiums for September contracts are low, so October appears to be your best bet.  TOL, trading for 32.52 as I type, has 30.00 October puts on the market for 0.85 as I type.

In the event of a market pullback, you sure have a decent buffer on the TOL puts below the current share price.  Though there’s not really any support around either of these strike prices, the short-term and long-term uptrends both look strong.

For IRAs, which do not allow selling naked puts, you could go long outright and sell covered calls to scrape some additional income off the top.  The ITB premiums are looking low for October, but TOL calls are selling for 0.85 and 0.60 at 34.00 and 35.00 respectively.  I’ve been looking at this trade for a little while, and may employ this strategy via an IRA.


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