Centex (NYSE:CTX) is a unique residential construction company with subsidiaries operating in four business segments: Home Building, Financial Services, Construction Services and Investment Real Estate. Centex' homebuliding subsidiary, Centex Homes, purchases and develops land or lots, and constructs and sells single-family homes, townhomes and low-rise condominiums. The Financial Services operations are engaged in the residential mortgage lending business, as well as other financial services related to the residential mortgage market. The Construction Services segment provides a range of commercial contracting services, including construction management, general contracting, design-build and preconstruction services. Investment Real Estate's operations involve the development and sale of land for industrial, office, multi-family, retail, residential and mixed-use projects.
The Residential Construction sector rallied again last week after industry stalwarts Toll Brothers (NYSE:TOL) and Pulte Homes (NYSE:PHM) offered forecasts that suggested the fundamentals supporting housing demand are strong. In addition, the Commerce Department reported that housing starts jumped to nearly a 21-year high after rising 4.7% in January. While some pundits remain concerned about the effects of interest rates going forward, most analysts believe the leading companies will be able to weather additional borrowing costs without much downside in share values.
As I mentioned previously, it has been very difficult to find conservative spreads for our model portfolio during the current (4 week) expiration period. However, the recent volatility in the underlying industry group has yielded a viable (OTM) spread credit in CTX options and although the position would be inappropriate for the MCM portfolio (given the previous speculative play in WPI), it warrants consideration by the some of the more-experienced readers of the newsletter. Traders should target a higher credit in the spread initially to take advantage of any consolidation in the issue. This position will not be included in the portfolio summary.
PLAY (less conservative - bullish/credit spread):
BUY PUT MAR-55.00 CTX-OK OI=2808 ASK=$0.25
SELL PUT MAR-60.00 CTX-OL OI=4557 BID=$0.60
INITIAL "NET-CREDIT" TARGET = $0.40-$0.50
POTENTIAL PROFIT (X 5 contracts) = $200
RETURN ON INVESTMENT (max) = 8%
COST BASIS = $59.60
LOSS-LIMIT/EXIT POINT = $61.00 (cons) - $59.50 (aggr)