A Cautious Trade for PulteGroup’s Earnings

by Tyler Craig | January 30, 2013 9:49 am

A Cautious Trade for PulteGroup’s Earnings

Housing stocks have been all the rage over the past year as investors have begun to embrace a continued recovery in the housing market. The popular SPDR S&P Homebuilders ETF (NYSE:XHB[1]) is up an impressive 138% since forming a key intermediate low in October 2011 at $12.21. The latest catalyst for the industry’s impressive run was a positive earnings beat from D.R. Horton (NYSE:DHI[2]), which soared 12% in Tuesday’s trading session.

The next homebuilder to step up to the earnings plate is PulteGroup (NYSE:PHM[3]). The release of its Q4 earnings is slated for Thursday morning, and currently the Street’s expectations are for its EPS to more than double those from the year-ago period.

PHMchart 300x232 A Cautious Trade for PulteGroup's Earnings
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To be sure, Pulte’s improving earnings of late have already driven the stock to new multiyear highs. Since the aforementioned low in the broader homebuilding ETF in October 2011, PHM has climbed 541%.

While many investors are hoping that Pulte’s earnings reaction follows in the footsteps of D.R. Horton’s, how much of the increased earnings are already baked into Pulte’s share price is still a big question mark. There’s always the chance that expectations are too high and Pulte disappoints in some fashion. Fortunately, the options market provides a few limited-risk strategies for structuring risk into an uncertain event like earnings.

Rather than snatching up shares of PHM, traders could enter March 21-23 call spreads for 75 cents. To initiate the position, buy the March 21 call while selling the March 23 call. The risk is limited to the initial $75 paid at trade inception and will be incurred if PHM sits beneath $21 at March expiration. The max reward is limited to $125 and will be captured if PHM rises above $23 by March expiration — which is most certainly a possibility if PHM beats the Street’s estimates and is rewarded with a DHI-like reaction.

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

Endnotes:
  1. XHB: http://markets.financialcontent.com/investplace./quote?Symbol=XHb
  2. DHI: http://markets.financialcontent.com/investplace./quote?Symbol=DHI
  3. PHM: http://markets.financialcontent.com/investplace./quote?Symbol=PHM

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