Resilient ‘Buy’ for a Top Homebuilder

Dear Reader,

Yesterday, we looked at a Daily Price Chart of Unitedhealth Group, Inc., noting that UNH’s OBV line is sloping up, validating the stock’s recent bullish trend.

For today’s Trade of the Day e-letter we will be looking at a monthly chart for DR Horton Inc. stock symbol: DHI.

Before breaking down DHI’s monthly chart let’s first review what products and services the company offers.

D.R. Horton, Inc. is one of the leading national homebuilders, primarily engaged in the construction and sale of single-family houses both in the entry-level and move-up markets. D.R. Horton’s operations are spread across markets in states in the East, Midwest, Southeast, South Central, Southwest and West regions of the United States.

Now, let’s begin to break down the monthly chart for DHI stock.

Below is a 10-Month Simple Moving Average chart for DR Horton Inc.

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Buy DHI Stock

As the chart shows, in November, the DHI 1-Month Price, crossed above the 10-Month simple moving average (SMA).

This crossover indicated the buying pressure for DHI stock exceeded the selling pressure. For this kind of crossover to occur, a stock has to be in a strong bullish uptrend.

Now, as you can see, the 1-Month Price is still above the 10-Month SMA. That means the bullish trend is still in play!

As long as the 1-Month price remains above the 10-Month SMA, the stock is more likely to keep trading at new highs and should be purchased.

Our initial price target for DHI is 184.25 per share.

Profit if DHI is Up, Down, or Flat

Now, since DHI’s Monthly Price is currently trading above the 10-Month SMA and will likely rally from here, let’s use the Hughes Optioneering calculator to look at the potential returns for a DHI call option spread.

The Call Option Spread Calculator will calculate the profit/loss potential for a call option spread based on the price change of the underlying stock/ETF at option expiration in this example from a 7.5% increase to a 7.5% decrease in DHI stock at option expiration.

The goal of this example is to demonstrate the ‘built in’ profit potential for option spreads and the ability of spreads to profit if the underlying stock is up, down or flat at option expiration. Out of fairness to our paid option service subscribers we don’t list the option strike prices used in the profit/loss calculation.

The prices and returns represented below were calculated based on the current stock and option pricing for DHI on 8/6/2024 before commissions.

Built in Profit Potential

For this option spread, the calculator analysis below reveals the cost of the spread is $640 (circled). The maximum risk for an option spread is the cost of the spread.

The analysis reveals that if DHI stock is flat or up at all at expiration the spread will realize a 56.2% return (circled).

And if DHI stock decreases 7.5% at option expiration, the option spread would make a 56.2% return (circled).

Due to option pricing characteristics, this option spread has a ‘built in’ 56.2% profit potential when the trade was identified*.

Option spread trades can result in a higher percentage of winning trades compared to a directional option trade if you can profit when the underlying stock/ETF is up, down or flat.

A higher percentage of winning trades can give you the discipline needed to become a successful trader.

The Hughes Optioneering Team is here to help you identify profit opportunities just like this one.

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Wishing You the Best in Investing Success,