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Real Estate Recovery: Long-term, low-risk options to profit from a rebound by 2010

Posted December 10, 2007

“These DHI calls give you the right (but not the obligation) to buy shares of DHI for $10 anytime before January of 2010. Since these calls carry $4.22 in intrinsic value, you’re paying a grand total of $1.78 to carry this position into January of 2010!” — Bryan Bottarelli

by Bryan Bottarelli

Baltimore — (TFN): You’re about to learn about an investment opportunity that nobody else in the entire country would even dare to recommend.The play surrounds around the troubled housing market – and specifically the trading actions of U.S. homebuilder DR Horton (DHI - NYSE). I’ve already shared this opportunity with my Bottarelli Research members. Considering last week’s news about the government’s new plan to aid any homeowners harmed by the housing market collapse, this incredible opportunity has once again shot back into the spotlight.

With record levels of unsold inventory, drastically reduced sales expectations, and new adjustable mortgage rates re-setting each passing day, U.S. homebuilder stocks have dropped to eye-popping levels. Now here’s the thing: Some of the best traders in the world have the unique skill to buy when everyone else is selling. When I noticed such extreme sell-offs in the homebuilding sector, I began to study the individual components of the HGX index.

What I uncovered could be an opportunity of a lifetime – and is surrounds around DR Horton (DHI - NYSE).

DH Horton graph

Based out of Fort Worth, Texas, D.R. Horton constructs and sells single-family homes. They also sell raw land and lots. With communities in 85 markets in 27 ranging from $90,000 to over $900,000, DHI is the largest homebuilder in the United States. But the key here is timing. You see, talk to anyone in the real estate business, and they’ll tell you that typical down-cycles last 2-3 years.

The big picture

My father, for example, has been a real estate developer all his life — with over 28 projects in 5 Midwest states. So when it comes to real estate, he’s a fantastic resource.

“How long will these real estate troubles last?” I asked him yesterday.

He replied: “You typically see these up and down cycles last less than three years. We will see a real estate turnaround happen eventually. It always does. The key is buying before the turnaround, having the patience to withstand any momentary bumps in the road, and then ride the sector back up.”

The trick is to get positioned for a real estate turnaround or the longest time frame and the lowest up-front cost. Keeping that in mind, I began to study the DHI options string. And I uncovered a new investment opportunity that could offer you an incredible amount of time for literally no risk. It could be the investment opportunity of the decade.

Here’s the way I’m looking at it: Shares of DHI are currently trading for $14.22. Now, if you look at the DHI January 2010 10 Calls (YRI AB), you’ll see that they’re currently trading for $6.00.

Now let me back up a second: If you’re unfamiliar with options, here is a quick lesson. These DHI calls give you the right (but not the obligation) to buy shares of DHI for $10 anytime before January of 2010. Since these calls carry $4.22 in intrinsic value, you’re paying a grand total of $1.78 to carry this position into January of 2010!

In my book, this is a fantastic deal. You’re risking $1.78 to get positioned for a U.S. homebuilder turnaround between now and January of 2010. That’s over 2 years!

Let’s play devil’s advocate for a moment

Of course, things could certainly get worse before they get any better. But put this play into perspective. That’s certainly a risk, but you’re only paying $1.78 in time premiums to carry that risk into January of 2010! To be honest, I’ve never seen a 3-year LEAP option carry such reduced price premiums, and that’s why I’ve already recommended this play to my Bottarelli Research members.

With every investor panic-selling the homebuilder stocks, now is the time to come in and scoop these 3-year call options for dirt cheap. If you’re patient enough, I truly feel that you’ll be handsomely rewarded. In fact, if DHI moves up to $25 or even $30 per share over the next 3-years, this could easily be a 2 to 3-bagger. That means you could easily make 200% to 300% off this play!

If you’re willing to bet on a housing recovery anytime between now and January of 2010, the DHI January 2010 10 Calls (YRI AB), which are currently trading for $6.00 per contract, are the steal of a lifetime.

Editorial Note: If you liked this investment strategy, we highly recommend that you become part of Bryan’s elite trading service called Bottarelli Research.

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Posted by Bryan Bottarelli · Filed Under Real Estate 

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