Mike Khouw and Carter Worth teamed up on CNBC's "Options Action" to give viewers an options trade for the homebuilding sector.
Worth analyzed iShares U.S. Home Construction ETF (AMEX:ITB) from a technical point of view and Khouw suggested an options structure for SPDR S&P Homebuilders ETF (NYSE:XHB). Worth explained that these ETFs are quite similar, but XHB is closer to an equal weight index, while ITB is dominated some 35% in two homebuilders. The charts are almost the same so his analysis can be used for both ETFs.
Worth believes the homebuilders are overvalued. He is concerned because ITB underperformed Consumer Discretionary Select Sector SPDR Fund (NYSE:XLY). It reached new highs recently, but it failed to reach new highs relative to XLY. ITB also broke its uptrend, which Worth sees as a sign of a struggle and he would take profits or take a short position in the name.
To make a bearish bet, Khouw wants to sell the October $48 put in XHB for 70 cents and buy the January $50 put for $3.20. The total cost for the options structure would be $2.50. Khouw said that the peak profits for the trade would be achieved if the stock drifts to $48 at the October expiration, but it probably won't lose any money if it trades sideways from here.
Also on CNBC's "Options Action," Khouw suggested a bullish options strategy in Verizon Communications Inc. (NYSE:VZ). He wants to sell the October $60 put for $1.80. The trade breaks even at $58.20 or 2.66% below the closing price on Friday. The strategy is similar to owning the stock and selling the $60 strike call, explained Khouw. If the stock trades below $60, Khouw would have to buy it at $60. If that happens, he is planning to sell upside calls against his potential long stock position and collect additional premium. The stock has already had quite a run so this is why Khouw is selling a put, instead of buying calls in the name.