An options bet that wins if homebuilder stocks continue to weaken under high rates

Published Wed, Jul 3 20249:54 AM EDT

Back in late May I published a bearish thesis on the homebuilders and laid out a trade for D.R. Horton (DHI) . Since then, homebuilders have continued to underperform the S & P 500 and as 10-year yields continue to climb back towards 4.5%. I believe that there is further downside and currently there is another opportunity to take another bearish trade on DHI. In my original thesis, I laid out that DHI was trading in a range between $140 and $160 over the past 6 months and at risk of breaking below the $140 support. Just earlier this week the $140 support level was broken and we can now confirm a new bearish trend. Moreover, the relative performance of DHI to the market signals that there could be further downside after the break of this major support level. Our downside target is now $125, the prior support level from before it rallied into the $140 to 160 trading range. DHI now trades at 8.8 times forward earnings, a slight discount to its historical average but with limited growth prospects. Analysts currently expects DHI to grow EPS by only 4% and revenue by 6% but as 10-year yields have approaches 4.5% again, housing starts and purchases have continued to take a hit this year. With a low implied volatility reading, DHI options are somewhat expensive. To align with our bearish outlook on DHI, I'm using the August expiration and buying the $140/$125 put vertical for a $6.25 debit. This entails: Buying the August $140 Puts at $8.55 Selling the August $125 Puts at $2.30 Using a put vertical spread allows us to offset the cost of buying a straight put by capping the downside. The total risk on this trade would be $625 per contract if DHI is above $140 at expiration. The maximum gain is $875 per contract if DHI is below $125 at expiration. This strategy offers a favorable risk/reward ratio, providing a potential profit if DHI continues to decline in line with our bearish technical and fundamental thesis. DISCLOSURES: (Bearish position in DHI) All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, NBC UNIVERSAL, their parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium. THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL'S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.