DailyPlay – Opening Trade (DHI) – May 30, 2024

DHI Bearish Opening Trade Signal

Investment Rationale

As many major consumer names trade closer to their 52-week lows as equity markets print new all-time highs, there are growing risks that the consumer is weaker than the economy suggests. One industry that is adjacent to discretionary is home builders. Recently, weakness in the home builders suggests that it may be heading in the direction of the discretionary sector and presents an opportunity to add short exposure in DHI. 

Technical Analysis

If we look at XHB, the Home Builders ETF, we see that it has continued to trade in a range between $100 and $110 over the past 4 months, however, the relative performance of XHB to the S&P 500 has started to underperform recently. This suggests that XHB is likely to revisit the bottom of the trading range and potentially break below it. And if we look at DR Horton (DHI) the largest of the home builders, it has recently traded in a similar range between $140 and $160 over the past 6 months, but the relative performance to its industry is poor and near its 52-week lows. This weakness suggests that it will revisit the $140 support level and potentially break lower, especially as momentum has recently turned negative.  

DHI – Daily

Fundamental Analysis

Now, looking at the business, DHI trades at 10.5x forward earnings, which is the upper bound of its historical average over the past 5 years. With some of the slowest expected EPS growth of only 4% among its peers, these valuations start to look expensive as 10-year yields climb above 4.6% again. 

Trade Details

Strategy Details

Strategy: Long Put Vertical Spread

Direction: Bearish Debit Spread

Details: Buy to Open 7 Contracts July 5th $140/$130 Put Vertical Spreads @ $2.95 Debit per Contract.

Total Risk: This trade has a max risk of $2,065 (7 Contracts x $295) based on a hypothetical $100,000 portfolio risking 2%. We suggest using 2% of your portfolio value and divide it by $295 to select the # contracts for your portfolio.

Trend Continuation Signal: This is a bearish trade on a stock that recently turned bearish.

1M/6M Trends: Bearish/ Mildly Bearish

Relative Strength: 6/10

OptionsPlay Score: 128

Stop Loss: @ $1.48 Credit. (50% loss of premium paid)

View DHI Trade

Entering the Trade

Use the following details to enter the trade on your trading platform. Please note that whenever there is a multi-leg option strategy, it should be entered as a single trade. 

Please note that these prices are based on Wednesday’s closing prices. Should the underlying move significantly during the pre-market hours, we will likely adjust the strikes and prices to reflect a more accurate trade entry. 

View DHI Trade