Follow Homebuilders to Higher Ground

by Ken Trester | September 7, 2012 1:05 pm

With Hovnanian‘s (NYSE:HOV[1]) surprisingly strong earnings report Thursday, which was boosted by increased orders, traders are wondering if it’s time to move back into the homebuilders.

For the near-term, my proprietary scans say yes. My program pores through thousands of stocks and selects the best and worst names, relying on data — not emotion — and this week, it turned up several strong contenders in the sector.

Two names stand out among the best for options trades: KB Home (NYSE:KBH[2]) and Ryland Group (NYSE:RYL[3]). The bullish call options my scans identified are vastly undervalued. What’s more interesting is that my scans tend to yield very near-term opportunities, but both call options have further-out expirations.

While I expect these trades to give us profits in about three weeks or less, the January expiration builds in a little protection from volatility if you need to hold longer.

1. Buy the KBH Jan 12.50 Call options at $1.15 or lower.

You might have to set a limit order[4] to avoid overpaying, but there’s significant volume in this series, so you should find a market maker willing to oblige at my $1.15 level.

With KBH trading just around $12 now, we don’t need a big move for these calls to be in the money, then hit my profit target of $1.90. As always, set a protective stop to close the calls if KBH closes below $11.30. Keep in mind that KBH reports on Sept. 17, so use any pre-earnings spike to take profits; don’t be greedy.

2. Buy the RYL Jan 32 Call options at $1.40 or lower.

Volume in this series is a bit lighter, but if you tread carefully and place your orders in smaller increments, instead of one big chunk of contracts, you’ll likely have better luck getting filled. Take profits if the calls hit my target of $2.60, and be sure to protect your capital — set a stop-loss to exit the trade if RYL stock closes below $26.60.

My scans also show Toll Brothers (NYSE:TOL[5]) as a good buy[6] for a short-term gain (one to two weeks) at current levels around $33.30, but I don’t see any low-cost options in TOLL at this point that are worth buying.

Ken Trester is editor of the popular Maximum Options program. Trester has been trading options since the first exchanges opened in 1973.

  1. HOV:
  2. KBH:
  3. RYL:
  4. set a limit order:
  5. TOL:
  6. a good buy:

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