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.
Click to Enlarge 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.