A Powerful Setup From This Great Compressed Stock

It’s Fed Day. It is often difficult to find trades just before the Fed Chair’s press conferences to discuss rate
policy announcements. However, today it wasn’t difficult at all. That’s because Meritage Homes Corp.
(MTH) a large home-building real estate business showed up on our list of compressed stocks. Its options
are relatively cheap compared to price movement after previous compression signals.
Two things make MTH a no-brainer this morning. First, the real estate industry is still shaking from the
earthquake settlement with the National Association of Realtors (NAR) where realtor’s commissions of
6% will no longer be the standard. Second, the FOMC announcement today and the Fed Chair’s press
conference could be a potential catalyst for a big move in this rate-sensitive business.
Be sure to read the ODDS Online Daily Trade Idea to see our specific strategy to take advantage of the
situation with an MTH option trade.

The MDM graph shows us the theoretical expectations for the future stock price movement (the orange
line) compared to the stock’s measured movement over the last 4 years (the blue histogram). You can
see that MTH made big moves more frequently than the modeled options prices currently expect. This
tells us that current options prices for April 19th are relatively cheap. Option buyers have the
advantage.

The Volatility Cone shows that 1-month volatility expectations for the next month are below the
historical volatility average, but the following month is closer to the average. That is because there is
an earnings report due before the May monthly expiration. As discussed on page 2, there are two big
potential catalysts for a big move for MTH even before the earnings report.

This Volatility Term Structure chart shows that options expiring April 19th have the lowest volatility
expectations. That means the April 19th expiration has the lowest relative options prices. This favors
option buyers at that expiration. The stock has a history of making big moves after a compression
signal and the potential catalysts could be a huge factor.

MTH share prices are compressed and options prices are cheap just as a few potential catalysts for big
moves are about to hit the real estate industry.
Be sure to read the ODDS Online Daily Trade Idea report to get the details of our trade idea for MTH.