Homebuilders draw bulls again

optionMONSTER

Homebuilders have been raging higher in recent days, and traders are looking for the momentum to continue for another week.

The iShares U.S. Home Construction Fund saw heavy buying on Tuesday in the January Weekly 24.50 calls that expire at the end of next Friday, Jan. 3, according to optionMONSTER's Heat Seeker tracking system. More than 10,800 of the options traded for $0.25 to $0.45 in volume that dwarfed the previous open interest of just 5 contracts, showing clearly that these are new positions.

The long calls lock in the price where traders can buy the stock, potentially providing significant leverage in a rally. But if the ITB remains below $24.50, the contracts will expire worthless. (See our Education section)

The ITB gained 0.41 percent on Tuesday to close at $24.41. The exchange-traded fund had pulled back from six-year highs above $26 reached in May but gapped up from the $22.50 level last week and has continued rising since.

As shown on the screen shot below from our researchLAB analysis tool, homebuilders as a group have risen about 10 percent since the Federal Reserve said last Wednesday that it would keep interest rates low, thereby allaying fears that revisions in monetary policy would lead to an immediate jump in mortgage rates. Hovnanian also saw bullish call buying on Tuesday, as did D.R. Horton and Toll Brothers a day earlier.

Total option volume in the ITB topped 16,200 despite Tuesday's holiday-shortened trading hours, more than triple its full-day average for the last month. Only 385 of those contracts were puts, a reflection of the bullish sentiment.

View photo

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(Chart courtesy of researchLAB . A version of this post appeared on InsideOptions Pro on Tuesday.)

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