Housing bulls build profits in $DHI

Option traders doubled their money on several bullish positions opened in homebuilder D.R. Horton just two weeks ago.

On May 24, Investitute’s proprietary programs showed that a sweep of calls expiring on June 15 were purchased, all at the same time, with shares at $41.68. The buying came in the forms of: 2,938 $41.50 calls for $1.35 to $1.37, 2,000 $42 calls for $1.09, and 2,000 $42.50 calls for $0.87. These were clearly new positions, as open interest in each strike was just 72, 732, and 31 contracts, respectively, before the activity appeared.

The investors were likely betting that concerns over construction costs, ranging from rising mortgage rates to trade conflicts over Canadian lumber, had reached a tipping point.

Those June $41.50 calls were marked at $2.73 today, the June $42 calls sold for as much as $2.71, and new buyers of the June $42.50 calls paid up to $2.30 for those contracts. The prices where those calls traded hands today were more than double their initial costs. The stock rose 7.1% in the same time frame, illustrating the kind of leverage that can be achieved with options.

Investitute co-founder Jon Najarian cited another round of heavy buying in August calls on CNBC’s “Halftime Report” today.

Long calls lock in the price where investors can buy a stock, letting them position for a rally at limited cost with the potential for significant leverage. They carry less risk than owning shares because the most that can be lost is the price of the options no matter how far the stock might fall.

DHI spiked higher this morning to an intraday high of $44.64 before pulling back to close at $44.19, still up 4.12% on the session. The stock has trended higher since Wednesday morning, when it was disclosed that purchase applications for home mortgages rose (seasonally adjust) 4% for the week ending June 1, breaking a 5-week streak of declines.