Housing bulls hope for hot summer

What summer break? Traders appear eager for a new sector to get to work – even as others settle down for a snooze in the shade.

As noted yesterday, plenty of ink has been spilled in the last week over the crash in high-flying Nasdaq stocks like Apple (NASDAQ: AAPL), Amazon.com (NASDAQ: AMZN), and Facebook (NASDAQ: FB). But just as those tech stocks powered down, the momentum has shifted into homebuilders.

Options traders took notice of the move on Wednesday. The first large transaction was detected in Toll Brothers (NYSE: TOL), with 4,000 of the June 38 calls sold for $0.95 and a matching number of July 39 calls sold for $0.95. Wait a sec! Why are they selling calls? I thought it was bullish! Well, here’s what seems to be going on:

  • It looks like they had previously sold the June 38s as part of a covered-call strategy. They owned TOL shares and wrote out-of-the-money contracts to earn premium. 
  • Now that the stock is moving, they bought back their short calls and rolled one month into the future.
  • Making the adjustment cost nothing aside from commissions because both legs priced for $0.95. But there is a method to the madness because their potential exit price on TOL rose $38 to $39. The trader also committed to holding the shares for the extra month.

Minutes later an even more bullish activity hit in D.R. Horton (NYSE: DHI). This time, they looked more than a year into the future by amassing 8,100 January 2019 35 calls for $4.35. The buyer now has the right to purchase DHI shares for $35 at any point over that horizon, no matter how high it may run. The contracts will break even if the stock closes at $39.45 on expiration, double at $43.70 and triple from a move to $48.05. Below $35, they’ll go out worthless.

Toll Brothers (TOL), 6-month chart

Source: OptionsHouse by E*TRADE

DHI rose 1.15 percent to $34.37, while TOL advanced 1.43 percent to $39.12. Both sent traders on a trip down memory lane as they probed levels last seen in early 2006 – more than two years before the infamous subprime mortgage crisis.

So…Is the bubble back? Industry watchers seem to think this time is different. They say the U.S. currently has a shortage of homes rather than a glut. Their crystal balls see demand picking up, especially as millennials raise families.1 Bean counters in the credit market point to a steady decline in bad loans – just as trend watchers say closing prices are accelerating higher.2

Speaking of being constructive, traders also targeted Builders FirstSource (NASDAQ: BLDR), a small-cap provider of supplies like doors, windows, and premade frames. (More than 2,100 August 17 calls were bought for $0.55.) BLDR ended the session up 1.67 percent to $15.57.

Bottom line: Housing stocks had a cool spring following a strong start to the year, but now some traders seem to be looking for a hot summer.


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1. Reuters: U.S. home prices to rise at a strong pace on tight supply: Reuters poll. 5/26/17.

2. Marketwatch: Home prices pick up steam as spring selling season heats up, CoreLogic says. 6/6/17. BusinessWire: CoreLogic Reports Mortgage Delinquencies Dropped to a 10-Year Low in March 2017. 6/13/17.