Homebuilding stocks have been thriving this year. Sure, they fell prey to the pandemic plunge, but what risk asset didn’t? It’s the behavior in the aftermath of March’s madness that is grabbing my attention. And any fears of mass unemployment laying wreckage to home values or housing demand have been buried six feet under.
If you want a simple, one variable answer for the industry’s resilience, take a good look at mortgage rates. The average 30-year fixed-rate mortgage in the nation recently breached 3%, causing no shortage of excitement. Investors have been marching steadily into stocks with exposure to the housing market.
That said, I’ve scoured the space and found my three favorite stocks to trade if you want to capitalize on continued strength. They are:
Their steady nature makes them all prime candidates for the poor boy’s covered call strategy. And after a brief look at their beautiful trends, I’ll share exactly how to build the trades. So, let’s dive in!
Homebuilding Stocks to Buy: S&P Homebuilders ETF (XHB)
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I’m always a fan of using an exchange-traded fund for betting on an industry. It allows a diversified approach that sidesteps any company-specific news that could torpedo my trade. XHB stock is the Street’s most popular homebuilders ETF, and counts all the major players among its top holdings. Because it trades about 3 million shares per day, it also offers adequate liquidity in its options.
XHB closed out the week at a new record high. Since its slightly extended, I’m going to build a trade that will profit even if it consolidates over the coming weeks. We’re buying a two-month in-the-money call while selling a one-month out-of-the-money call against it.
The Trade: Buy the Dec $56 call and sell the Nov $59 call for a net debit of $2.15.
The ideal scenario is to have XHB work its way toward $59 by November expiration.
KB Homes (KBH)
KB Homes finally broke out on Friday by clearing the twin pivots formed over the past month. Its ascent off the March low has been impressive. From the single digits, it’s come roaring back to over $40. The 20-day, 50-day and 200-day moving averages are rising beneath the price in confirmation of buyers’ dominance across time frames.
The uptrend has been choppy and has me favoring position trades that profit from time decay instead of short-term, aggressive swing trades. This makes the poor boy’s covered call a good fit if you think the mildly bullish behavior continues. The idea behind the strategy is to buy a long-term call as a stock substitute. Then we’re selling short-term out-of-the-money calls to profit from the passage of time.
The Trade: Buy the Jan. $40 call and sell the Nov. $44 call.
Once again, we’re shooting for the stock to rise to the short call strike ($44) by November.
Homebuilding Stocks to Buy: D.R. Horton (DHI)
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D.R. Horton rounds out our list of homebuilding stocks to buy. And of the three picks here, this is definitely the most volatile. I view this as a positive attribute for short-term trades. Like KBH, DHI stock reached a new record on Friday. It sits atop a glorious uptrend that is likely to continue.
Another variable working to the advantage of a poor boy’s covered call strategy is the low level of implied volatility in today’s picks. For its part, DHI has an implied volatility rank of 19%. The relative cheapness makes call diagonal spreads a low-cost trade that carries minimal risk.
With all three picks, you can wait for a break of Friday’s high if you want confirmation that homebuilding stocks are moving higher in the new week.
The Trade: Buy the Jan $75 call and sell the Nov $82.50 call for around $5.80.
On the date of publication, Tyler Craig did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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