Residential construction stocks were not able to escape the bearish pull of the market last week, and we anticipate this is only the beginning with a group of builders scheduled to release their earnings during the coming week. D.R. Horton, Inc. (NYSE:DHI) will be releasing earnings on Friday, April 26, before the market opens, but we will also be watching the Ryland Group (NYSE:RYL) report on April 24 and the PulteGroup (NYSE:PHM) release on April 25 to see how these two announcements affect DHI.
DHI is being squeezed from two sides. On the one hand, lumber prices continue to climb higher and higher — rising from about $270 in September to a current price of around $370 — which is eating into DHI’s margins. On the other hand, we’re seeing some signs of promise from the housing market in general, but most of the gains are coming from new apartment construction as the rental market continues to swell. Unfortunately, the residential housing market hasn’t been able to keep pace. This phenomenon was highlighted last week as the New Residential Construction numbers, released by the U.S. Department of Housing and Urban Development, showed both single-family authorizations (building permits) and single-family housing starts were lower in March than they were in February.
With DHI sitting at support around $22, we are buying the at-the-money (ATM) strike price because it will enjoy the greatest benefit — thanks to its high positive vega — as implied volatility levels rise as we get closer and closer to the company’s earnings announcement. Also, depending on how the RYL and PHM announcements go, you could consider taking profits from this trade off the table before DHI’s earnings announcement.
‘Buy to open’ the DHI May 22 Puts (DHI130518P00022000) for a maximum price of $1.30.
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