Housing Comeback Creates an XHB Play

by Tyler Craig | August 9, 2012 6:30 am

Traders looking for exposure to a continued rebound in the housing market should consider plays on the SPDR S&P Homebuilders ETF (NYSE:XHB[1]). The fund includes a basket of housing-related companies from builders like KB Home (NYSE:KBH[2]) and Pulte (NYSE:PHM[3]), to home improvement players like Home Depot (NYSE:HD[4]) and Sherwin Williams (NYSE:SHW[5]). By purchasing a broad swath of companies via the XHB, traders avoid the risk of picking a housing stock that ends up underperforming the broader sector.

On the news front CoreLogic[6], a data firm based in Santa Ana, Calif., recently reported home “prices rose by 2.5% in June from a year ago, and by 6% from the previous quarter.… The quarterly jump was the largest since 2005.” Continued signs of a comeback in housing prices ought to bolster investors’ confidence and increase their desire to snatch up shares of housing-related stocks.

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Good news aside, the price action in XHB of late has been soundly in favor of the bulls. From the October 2011 low of $12.21, the homebuilders ETF rallied over 83% to $22.43 in April 2012. Since the April peak, it has spent the last four months digesting the impressive gain by building a solid base. If XHB can clear resistance in the $22 to $22.50 area, another leg higher may be in the offing.

Traders believing the rise in homebuilders is likely to continue in the coming months might consider entering a longer-term bull call spread. Here are two suggestions:

Buy the Dec 22-25 bull call spread for $1.16
Max risk $1.16
Max reward $1.84
Breakeven $23.16

Buy the Dec 22-24 bull call spread for 88 cents
Max Risk 88 cents
Max Reward $1.12
Breakeven $22.88

The Dec 22-24 spread is the more conservative of the two because it only requires the XHB to rise above $24 by December expiration to capture the maximum profit.

At the time of this writing Tyler Craig held no positions in any stocks mentioned here.

  1. XHB: http://studio-5.financialcontent.com/investplace/quote?Symbol=XHB
  2. KBH: http://studio-5.financialcontent.com/investplace/quote?Symbol=KBH
  3. PHM: http://studio-5.financialcontent.com/investplace/quote?Symbol=PHM
  4. HD: http://studio-5.financialcontent.com/investplace/quote?Symbol=HD
  5. SHW: http://studio-5.financialcontent.com/investplace/quote?Symbol=SHW
  6. CoreLogic: http://online.wsj.com/article/SB10000872396390444246904577575072488703032.html

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