The real estate market and the homebuilders in particular have been enjoying a big party over the last few years as a result of interest rates being at historic low levels. Low interest rates allow more buyers to purchase a home, thereby increasing demand and price.
The low interest rate environment also spurs the real estate market on as speculators enter the real estate market with the intent of flipping properties and making a tidy profit. But with the economy improving and the U.S. Federal Reserve increasing short-term interest rates, interest rates in general have risen in the last few months taking the life out of the real estate party. Speculator flipping has flopped and homebuilders in particular have been hit very hard by the increase in interest rates.
As to when the home building market makes a recovery back to its high flying days will be left to the people with crystal balls. But in the short term, a savvy stock option trading investor can potentially make a profit as a result of the homebuilder’s pain.
We will analyze taking positions in bear call credit spreads positions on homebuilder stocks. Using PowerOptions new SmartHistoryXL option back testing tool, we selected bear call credit spreads positions for homebuilders stock symbols on August 21, 2006 with all stock options expiring on September 15, 2006 (September options expiration day).
The parameters used for the search were: probability of success greater then 70%, percent return greater than 2%, results sorted from highest to lowest by probability and sectors/industry set for residential construction.
The results of the back test analysis are shown below:
| Results for Bear-Call Credit Spread search on August 21 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock Sym |
Stock Price 8-21-06 |
Short Opt Strike &Mo. |
Short Opt. |
Short Opt Bid |
Long Opt Strike &Mo. |
Long Opt |
Long Opt Ask |
Net Credit |
Stock Price 9-15-06 |
% Ret. |
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| SPF | 23.36 | 06 SEP 25 | SPFIE | 0.50 | 06 SEP 30 | SPFIF | 0.05 | 0.45 | 24.20 | 9.90 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| WLT | 50.52 | 06 SEP 55 | WLTIK | 0.45 | 06 SEP 60 | WLTIL | 0.15 | 0.30 | 48.70 | 6.40 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| BZH | 40.55 | 06 SEP 45 | BZHII | 0.40 | 06 SEP 50 | BZHIJ | 0.10 | 0.30 | 39.60 | 6.40 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| RYL | 42.29 | 06 SEP 45 | RYLII | 0.90 | 06 SEP 50 | RYLIJ | 0.20 | 0.70 | 45.53 | 4.00 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| LEN | 45.23 | 06 SEP 50 | LENIJ | 0.20 | 06 SEP 55 | LENIK | 0.05 | 0.15 | 46.39 | 3.10 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| CTX | 49.23 | 06 SEP 55 | CTXIK | 0.25 | 06 SEP 60 | CTXIL | 0.10 | 0.15 | 53.45 | 3.10 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Analysis
Simply shorting these positions would have yielded an average return of -2.7%, but the bear call credit spreads homebuilder strategy for stock options expiring in September of 2006 yielded an average return of +5.5% (25 days) with a 100% success rate. As usual the pundits will be skeptical with only one month’s results. The results for this strategy for stock options expiring in June, July, and August of 2006 were +6.8%, +8.7%, and -9.8%, respectively. The poor result in August was a result of having only three positions (two profitable) with one position, MTH, having a significant loss. But with an adequate stop-loss strategy this position could potentially have been exited with only a small loss.
Join PowerOptions today, and you too can start reaping the benefits of the bear call homebuilder investment strategy.
PowerOptions provides Internet based tools for analyzing stock options with specific search criteria and for finding potentially lucrative option income. For those seeking to execute a bear call spread investment strategy for their personal portfolios, PowerOptions provides an Internet based search engine for finding potentially lucrative income producing bear call spread options positions.
[tags]stock options, option income, investment strategy, bear call credit spreads, stock symbols[/tags]