Monday, May 5, 2008

Option Trade Today

Today I bought a September 20 Call Option on MTH. MTH is a residential housing construction company. The price was 3.20. The stock is currently at about 19.50. The stock has consolidated for 1 month above its 50 day moving average. The Bollinger Bands (an estimate of volatility) have contracted which can help increase the trade profitability as implied volatility is likely lower. The stock must go up about 4 dollars or 20% by September to breakeven.

Despite the woes of the housing industry and the huge declines over the last couple years, this industry group has been one of the strongest performers so far this year. Also, there are positive demographics for homebuying through most of 2008. This may well allow some recovery in homebuilding stocks before a more dramatic and longer term decline a few years down the road.

I have a stop loss based off the stock price for MTH. If the stock closes below 17.78, I would have to have a very sound reason not to immediately exit the trade.

I will update the exits and profit/loss of every trade I post on this blog.

Pete

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