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Move Into an Options Duplex Before Earnings

After falling prey to several pitfalls during the past couple years, the housing sector appears to have finally put together a solid and sustainable recovery (fingers crossed). Specifically, housing starts have been on the rise for some time, culminating in a four-year high of 872,000 starts in September, according to data from the Commerce Department.

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Keying off this budding recovery, housing stocks have been on fire, with the SPDR S&P Homebuilders ETF (NYSE:XHB) breaking out above $26 last week — its highest level since September 2007.

Within the sector, builders such as Lennar (NYSE:LEN) and PulteGroup (NYSE:PHM) have seen their stocks soar roughly 100%, while Hovnanian Enterprises (NYSE:HOV) shares have nearly tripled in value since the start of the year.

While Beazer Homes (NYSE:BZH) and D.R. Horton (NYSE:DHI) are not the hottest stars in the housing sector, the duo are slated to report their respective fourth-quarter earnings Monday morning, providing a potential opportunity for options traders with a stomach for risk.

Trading D.R. Horton

Wall Street is expecting D.R. Horton’s profits to double from the year-ago period to 28 cents. Revenue, meanwhile, is seen rising 22.9% to $1.35 billion. The company has seen double-digit year-over-year revenue growth for the past four quarters, bolstering the case for a turnaround in the industry.

However, despite strong economic reports and impressive revenue growth, the brokerage community has yet to fully embrace D.R. Horton — 14 of the 22 analysts following DHI rate the shares a “hold” or worse, compared to only 8 “buys.” From a contrarian perspective, this lack of “buy” ratings creates plenty of room for upgrades on a company with real growth potential.

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In terms of technical prowess, DHI has come the closest to keeping pace with its peers in the XHB. Year-to-date, the stock has gained roughly 64% along key support at its 10-week and 20-week moving averages. Furthermore, the stock’s 50-day trendline has played sweeper since June, containing no less than three DHI pullbacks. Currently, the stock is consolidating into its 50-day, with additional support residing at the round-number $20 level.

Given DHI’s technical and fundamental strength over the past year, the stock’s pullback to support amid a longer-term uptrend provides a potential entry point for a bullish pre-earnings options trade. Instead of buying a call outright, however, traders should consider limiting risk by opening a bull call spread.

With November implieds suggesting a potential post-earnings move of 6%, a November 21/22 bull call spread stands a good chance of realizing a profit.

At the close on Thursday, this spread was offered at 39 cents, or $39 per pair of contracts, placing breakeven at $21.39 — a gain of only 1.8% from yesterday’s close. A maximum profit of 61 cents, or $61 per pair of contracts, is possible if DHI closes at or above $22 when November options expire.

Trading Beazer Homes

Beazer Homes is expected to post a narrower fourth-quarter loss of $1.11 per share, up from a loss of $2.35 per share a year ago. Revenue, meanwhile, is forecast to fall 1.1% to $331.2 million on a year-over-year basis.

While Beazer’s fourth-quarter figures don’t look all that promising, investors might be paying closer attention to the company’s forward looking statement in the wake of BZH’s appearance at Deutsche Bank’s Leveraged Finance Conference. Specifically, Beazer told analysts that it is building communities faster than expected this year and that it anticipates spending more on land in fiscal 2013.

Speaking of analysts, there isn’t much confidence among those following BZH, with the stock attracting 4 “sells,” 4 “holds” and 4 “buy” ratings. That said, analysts could be poised to shake things up, as BZH is trading firmly above the consensus 12-month price target of $15.63, closing Thursday at $17.

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Technically speaking, while BZH is a laggard in the XHB, the stock still is up more than 38% so far this year. By comparison, the S&P 500 Index has added only about 9% during the same time frame. BZH has spent more of 2012 battling overhead resistance at $20 — a level that the stock has not closed a session above since May 2011.

Despite resistance looming overhead, BZH still has considerable room to run before encountering the $20 level. For those traders looking to take a risk, a November 17/18 bull call spread could take advantage of a post-earnings rally on a positive earnings outlook from Beazer on Monday.

At the close of trading on Thursday, this trade was offered at 35 cents, or $35 per pair of contracts. Breakeven rests at $17.35, or a gain of 2% from yesterday’s close, while a maximum profit of 65 cents, or $65 per pair of contracts, can be had if BZH closes at or above $18 when November options expire.

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

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