Trade Update March 22nd, 2013, 2:50 pm: XHB has failed to breakdown in the past month as the market has held up. But just this week, LEN reported strong earnings that got everyone excited about the sector again, only to be met with stout selling pressure. XHB also perked above 30, only to be met with selling pressure.
Our view is that XHB has priced in all the good news. There are fewer and fewer buyers on each incremental data point, and against that, the valuations in the sector are sky-high. I’m long the Apr 27/25 put spread that is close to worthless, but XHB still feels due for some selling, so I’m going to get back in the game with a trade adjustment.
I am going to buy the Apr 29 / 27 put spread. So I’m basically buying the Apr 29 put to open, and selling the Apr 27 put (that I’m currently long) to close. My new position is now long the Apr 29 / 25 put spread.
Action: Bought the XHB ($30.00) Apr 29 / 27 Put Spread for $0.30
New Position: Long the XHB Apr 29 / 25 Put Spread for $0.75
I have a much better chance on a move lower in XHB now. My new break-even level is 28.25, vs. 26.55 previously. I’ve put some extra premium in the trade, so that’s the risk, but this week’s action says the bulls are tired.
Original Post February 22nd, 2013: Mission Accomplished Mr. Bernanke, Housing Bubble Re-Inflated!
Here is a preview of what I will discussing tonight on Options Action on CNBC at 5PM:
Based on the housing market headlines I’ve seen in the past year, you’d think housing prices were increasing 20% a year or something. The “recovery” is only a recovery in comparison to the past few years. It’s still a housing market depression when viewed in the context of the past 25 years. New Home Sales over the past 25 years:
The “recovery” is not looking so strong anymore.
Meanwhile, the housing-related stocks are trading like it’s boom times in the market. Enis touched on this in his Macro Wrap post on Feb. 20th, writing:
The housing sector is one of the most overvalued sectors in the U.S. stock market, for several reasons. Here are 3 brief points on why I’m bearish on TOL and U.S. homebuilders as a whole:1) This is a housing recovery, not a housing boom. The housing market has clearly improved in the past 12 months, but TOL’s current selling pace in its communities is still below its 25 year average2) Meanwhile, the stock is priced for more than a boom. The stock is trading at 2005 levels, when the stock earned more than $4 per share. In 2013, it’s slated to earn around $1.3) Relative valuation for other sectors much better than homebuilders like TOL. If you want to get long the U.S. housing market, buy Toyota or Ford.
TRADE: XHB ($27.85) Bought the Apr 27/25 Put Spread for .45
-Bought 1 Apr 27 Put for .70
-Sold 1 Apr 25 Put at .25
Break-Even on Apr Expiration:
-Profits of up to 1.55 between 26.55 and 25 max profit of 1.55 at 25 or below
-Losses up to .45 between 26.55 and 27, max loss of .45 at 25 or above
Trade Rationale: If the Market is in a topping phase, which I believe it is, I want to get short exposure to sectors that I think have overshot on the upside, or in the case of housing and related sectors, already discount a good bit of the supposed recovery.