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Trade of the Day: SPDR S&P Homebuilders ETF (XHB)

Ken Trester

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This year’s tax-cuts have been acting like a quantitative easing program for the market, and it is now estimated that tax refunds for next year will be 26% higher than they were this year. While higher gas prices may offset that increase, especially during the summer months when a lot more people are traveling, this could lead to an increase in consumer spending.

One thing I’ve noticed is that the retail sector has been really positive. Some great examples were Signet Jewelers Ltd. (NYSE:SIG) and Tiffany & Co. (NYSE:TIF), which had fantastic earnings, as did Restoration Hardware Holdings, Inc (NYSE:RH).

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The consumer stocks I’ve got my eye on now are the homebuilders. They’ve been hit pretty hard, but I think we’re going to get a bounce-back in those. Here’s my recommendation for a SPDR S&P Homebuilders ETF (NYSEARCA:XHB) call debit spread:

Using a spread order, buy to open the XHB July 20th $42 call and sell to open the XHB July 20th $43 call for a net debit of about $0.35.

Note: There are multiple July expirations available for XHB options. Be sure you are opening the monthly options that expire on Friday, July 20, 2018.

A debit spread is simply a way to lower the cost of buying options, as the option that you sell to open (short) helps offset the cost of the option that you buy to open. Therefore, this call debit spread is a way to lower the cost of buying bullish call options. Many brokers will require the use of margin and/or a set amount of reserved capital to execute a debit spread; contact your broker directly for specific requirements.

Despite the rate hikes, we’re in the initial stages of rates going up, and it’s not increasing the mortgages right now — we’re still at a very low level. Just think back to the ‘70s, when we were paying 20%! Those were the days of the “bond vigilantes”; I was buying Treasury bonds and getting 18%, 19% for it. XHB is almost right there at our strike price…so it won’t take much of a rise to actually make two to three times your investment.

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Ken Trester is editor of the popular Maximum Options program. Trester has been trading options since the first exchanges opened in 1973 with a winning streak that goes back to 1984 with money-doubling average annual profits since 1990.

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