DR Horton (DHI) Powers to Record High

This week we are looking at another of the Investor’s Business Daily (IBD) Top 50 List companies.  We use this list in one of our options portfolios to spot outperforming stocks and place option spreads that take advantage of the momentum.

DHI is an outperformer in the markets. The stock closed at an all-time high in the past week while the S&P 500 would need to rally another 7% to achieve the same milestone. Check out what the following two analysts have to say about the stock – D.R. Horton (DHI) Gains As Market Dips: What You Should Know and D.R. Horton, LGI Homes In Buy Range, Lowe’s Sets Up As Coronavirus Fuels Housing Stocks

Technicals

DHI has posted gains in the last six straight months and shows renewed upward momentum after breaking above the August top. The stock was held lower by horizontal resistance at $75.60 in September and this same price point is now seen as downside support. There is also a rising trendline in play that shows further support in the $74-$74.50 range. Back in June, DHI hovered around its 20-day moving average for about a month before continuing the upward momentum. A similar pattern could be playing out now as the stock spent most of September consolidating around its 20 DMA.

DHI Chart October 2020

If you agree there’s further upside ahead for DHI, consider this trade which relies on the stock remaining above $77.50 level through the expiry in five weeks.

Buy To Open DHI 06NOV20 75 Puts (DHI201106P75)
Sell To Open DHI 06NOV20 77.5 Puts (DHI201106P77.5) for a credit of $0.89 (selling a vertical)

This credit is $0.02 less than the mid-point of the option spread when DHI was trading near $78.  Unless the stock rallies quickly from here, you should be able to get close to this amount.

Your commission on this trade will be only $1.30 per spread.  Each spread would then yield $87.70. This reduces your buying power by $250 and makes your investment $162.30 ($250 – $87.70).  If DHI closes at any price above $77.50 on November 06, both options will expire worthless, and your return on the spread would be 54% ($87.70 / $162.30), or 616% annualized.

Changes to Investor’s Business Daily (IBD) Top 50 This Week:

IBD Underlying Updates October 3, 2020

We have found that the Investor’s Business Daily Top 50 List has been a reliable source of stocks that are likely to move higher in the short run.  Recent additions to the list might be particularly good choices for this strategy, and deletions might be good indicators for exiting a position that you might already have on that stock.

As with all investments, you should only make option trades with money that you can truly afford to lose.

Happy trading,

Terry