Call Options Or Put Options On DR Horton (DHI)?

| July 18, 2012 | 0 Comments

DHI OptionsDR Horton (DHI) is the largest homebuilder in the United States.

DHI has been moving higher lately.  Investors are hopeful housing is finally turning the corner after suffering through seven long years after the real estate bubble burst.

DHI currently trades for $18.51 per share.  It’s up 132% from the 52-week low of $7.97.  And it’s near the 52-week high of $19.34. 

Is this an opportunity to buy call options on DHI as residential homebuilders soar higher?  Or should you buy put options on DHI as the housing recovery falls flat?

The bulls make a convincing argument…

Housing is one of the few US economic data points we’ve seen strength in over the last few months.  New home sales and pending homes sales both beat estimates a few weeks ago.  Housing starts, building permits, builder confidence, and construction spending also came in ahead of expectations. 

And most importantly of all… home prices are increasing. 

The Case-Shiller 20-city composite has moved up from a low of 136.49 in January to 138.55 in April.  This is the first time home prices have increased without the help of massive tax credits since the bubble burst.

Simply put, these are all very good signs for the housing market and homebuilders.

At this point, DHI’s earnings estimates don’t anticipate a housing market recovery until the second half of 2014.  But all signs are pointing to the recovery much sooner than that.

As analysts ratchet up their earnings estimates, DHI’s sure to soar.  

But the bears have a compelling case as well… 

Look, we’ve heard the housing market is on the verge of rebounding time and time again.  And every time we get a few months of good housing data, investors rush out to buy homebuilder stocks. 

But their hopes of a rebound have been dashed time and time again as well. 

Investors who chase homebuilder stock rallies get stuck holding the bag.  Inevitably the housing data weakens and homebuilder stocks come crashing back to earth. 

And with the recent weakness in employment, retail sales, and consumer confidence there’s a good chance housing data will weaken as well.

The bottom line is we may be nearing a bottom in housing.  But with economic growth slowing, we’ll likely see DHI’s stock tumble lower in the short term.

If you think the bulls are right, take a look at buying the DHI January 2013 $21 Call for around $1.05. 

If you think the bears are right, take a look at buying the DHI January 2013 $16 Put for around $1.07.

***Editor’s Note***  Our esteemed friend and colleague Robert Morris is on to something I think you’ll want to know about.  He’s going to release a new biotech recommendation on Thursday in his newsletter.  So why am I telling you about it?  Because he’s recommended this stock 3 times!  The first time, his subscribers closed it out for a 114% gain.  The second time it was 136%.  Who knows how high it’ll climb this time around!  And remember, this isn’t some pump and dump.  Robert just has a keen sense of the market for this stock– and he thinks it’s ready to pop again.  Click here for details…

Good Investing,

Corey Williams

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Category: Call Or Put Options?

About the Author ()

A former banking executive, Corey Williams is the Chief Options Strategist and co-editor of our well-known daily newsletter, Options Trading Research. Corey’s extensive experience with options goes all the way back to his days in corporate finance. It was this decade in banking where Corey discovered the most important skill an options trader can have– the ability to analyze a company or sector to determine its likely future direction. And now he’s brought this background, experience and love of options to Options Trading Research, the unique daily e-letter devoted exclusively to helping individual investors profit from the very lucrative options market.