Last Month's Income Report: July 12th, 2021
July got off to a bumpy start, with some sharp sell-offs in stocks. This included Thursday’s 0.9% drop in the S&P 500, the worst one-day decline in the index since mid-June. But the major indices rebounded Friday as traders bought the dip and closed the week out at record highs.
I said last week that we closed 13 winning positions in June — 12 winners and one loser — booking $675 in income. That was our first losing position of the year following 61 winners in a row.
For the first half of the year, Options Income Blueprint members who sold just one contract of each trade could have earned $4,837.
We’ve kicked off the second half of the year with two more winners, adding $163 to our cash pile.
No, your eyes aren’t playing tricks on you. That’s a 241% annualized return for D.R. Horton (DHI). That makes it one of our highest returning trades of the year on a percentage basis.
So, let’s take a closer look at it…
I first recommended this homebuilder to Options Income Blueprint members in January 2020. At the time, I told members that I hadn’t gone near a housing stock since the crash in 2008.
My method is based on fundamentals, and for many years the homebuilders’ fundamentals were a mess. But the tide has obviously turned.
As you can see in the chart below, the SPDR S&P Homebuilders ETF (XHB) enjoyed a strong run off the March 2020 lows.
One of the biggest surprises of the coronavirus pandemic was its effect on the housing market. There was an unprecedented run on housing despite the broader economic turmoil as the Federal Reserve slashed interest rates and stay-at-home were enforced across the country.
Low mortgage rates and skyrocketing demand caused home prices to soar and inventory to dry up. This situation was only exacerbated as the economy strengthened, consumer sentiment improved and supply chains were disrupted.
As the housing boom progressed and top homebuilders delivered earnings beat after earnings beat, their stocks shot to record highs.
D.R. Horton is my favorite among this group, which also includes PulteGroup (PHM), Lennar (LEN), KB Home (KBH) and Toll Brothers (TOL).
Besides the fact that DHI has been crushing earnings estimates, I like that the company has seen its operating margins increase in recent quarters. I believe Wall Street is moving toward valuing homebuilders based on margins and profits rather than revenues.
Plus, DHI’s options are more liquid than its peers and offer very attractive premiums.
We’ve traded DHI successfully three times already this year, generating $276 in cash.
In our most recent trade, I recommended selling the DHI Jul Monthly (7/16) 90 Put for around $1.73.
That was a big chuck of cash. Had the option expired worthless, we would have earned 1.9% over the $9,000 in capital we put up for the trade in 11 days, or 64% on an annualized basis.
But the following day, DHI had run up more than 3.5%, so I recommended members take profits off the table. We bought back the put we sold for $0.54, booking a profit of $1.19, or $119 per contract. That represented a return of 1.3%. And since the trade was only open for two days, our annualized return shot up to 241%.
Now some analysts caution that the outlook for U.S. homebuilder stocks is dimming as home prices stabilize and sales slow. And DHI took a hit late last week in part due to an analyst downgrade from RBC Capital Markets.
I’ll be monitoring the situation closely. However, one of the benefits of our option selling strategy is that we do not need the underlying stock to move higher. We simply need it to stay above the strik price of the put we sold.
DHI is also expected to report earnings later this month. This could lead to elevated volatility in the option chains that we can capitalize on.
Personally, I don’t think the run in the homebuilders is finished. And I don’t think our profits in DHI are either.
First, I’d like to remind everyone that a market sell-off, even a sharp one, is not the same thing as a correction. And a correction is not the same thing as a bear market.
Too often traders get spooked by short-term gyrations in the markets. While a larger correction and even a bear market are certainly possible, they are not likely.
Why, you ask?
Well, the main reason is that there is currently no better place for people seeking a return on their capital to put their money than in the U.S. stock market.
In June, retail investors made nearly $28 billion in net purchases of stocks and exchange-traded funds, according to Vanda Research. This was the highest monthly amount since at least 2014 and surpassed even the retail trading surge we saw in January during the meme stock mania.
By year-end, Goldman Sachs analysts expects consumers and money managers to increase cash inflows into equities by as much as $500 billion.
This influx of cash is likely to put a floor under any market sell-offs. But I will remind you that the options selling strategy we use in Options Income Blueprint is market agnostic.
In other words, I don’t really care if we are in a bull or a bear market. We trade through both kinds of markets… and sideways ones as well.
I am confident that we will continue to rake in cash in the second half of the year, earning excellent rates of return. If you’ve ever considered trading alongside us, now is a great time to start.