Build Additional Profits in Housing With a Call Roll-Up

However, this play on XHB is a bit more aggressive than the last

   

Build Additional Profits in Housing With a Call Roll-Up

Continued optimism in the housing sector drove the SPDR S&P Homebuilder ETF (NYSE:XHB) to yet another bull market high north of $24.50 at the end of last week. The likes of KB Home (NYSE:KBH), PulteGroup (NYSE:PHM) and D.R. Horton (NYSE:DHI) are all seeing increasing momentum in their uptrends.

My last mention of the burgeoning housing space highlighted XHB’s recent breakout over $22 along with a couple of bull call spread ideas. At the time, the suggested Dec 22-24 bull call spread was trading for 88 cents and offered a profit potential of $1.12. Let’s take a renewed look at the position and highlight an interesting adjustment to help maximize gains while reducing risk.

XHBChart1 300x170 Build Additional Profits in Housing With a Call Roll Up
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Given the 12.7% rise in XHB since my aforementioned article published on Aug. 9, the Dec 22-24 bull call spread has increased in value from 88 cents to $1.40, generating a 59% return thus far. Because the spread can reach a max value of $2, you still have an additional 60 cents you can make if XHB remains above $24.

Suppose you still are bullish on XHB, but would like to modify your position to reduce risk yet increase the amount of potential upside profit. A technique called “rolling up” might be just the ticket.

Rolling a bull call spread consists of closing your existing spread while opening up a new spread with higher strike prices. Suppose you closed the Dec 22-24 call spread for $1.40 and opened up a Dec 24-26 spread for 95 cents. This would cut your overall risk by 45 cents (1.40 – 0.95). On the upside, you now have the ability to rack up $1.05 in additional profits instead of the original 60 cents.

Of course, the new spread is a bit more aggressive, as it now requires XHB to rise above $26 to capture the max profit.

A second consideration for those thinking that XHB might be a bit too extended at current prices would be to close the existing Dec 22-24 call spread and wait for a pullback before entering the new Dec 24-26 call spread.

As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, http://investorplace.com/2012/09/build-additional-profits-in-housing-with-a-call-roll-up-xhb/.

©2014 InvestorPlace Media, LLC

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