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Strategies & Market Trends : Contrarian Investing -- Ignore unavailable to you. Want to Upgrade?

To: jsabelko who wrote (133)	9/14/2006 10:09:19 PM
From: fedman	Respond to of 4080

XHB might be perhaps my first time at being clever that has paid off. Basically, the XHB is an AMEX spyder of homebuilder stocks. My idea was to generate income by writing uncovered calls, with the understanding that I would buy the underlying security if the price started to climb. So, I wrote a December 35 call on the XHB for about $1.25. I did this about a month ago and figured that an index stock would be unlikely to jump hard on an individual day, unlike a specific company. So I'd have more time to evaluate weather to buy out my call, or buy the underlying. Of course, this is reflected somewhat in the price in that I could probably get a better premium on an individual stock, but...just another variable. The key, to me, for XHB, is that i figured if it increased by 10%, from roughly 32 up to $35, then I would be happy to buy it and let the option be exercised or write another option on it in december if the XHB fell back. In fact, I plan on buying 1/2 the shares necessary to cover the call if it gets to $34 and the other half if it gets to $36. I know, I know kind of complicated, but I think that: 1. The broader indexes are probably due for a correction so that, 2. It is likely that I'll never have to buy the shares. Regarding whether or not were at a bottom for homebuilders, based on the link I provide in one of my posts here, the Barron's article seems to feel that Homebuilders are cheap. The article goes through a whole bunch of comparisons to book value to come up with the argument. However, given the liklihood of future rate increases, the bad press that keeps coming out on the housing market, I think that we are a quarter or two away from any kind of uptick. My preference for when I take a long stance on a Homie would be to buy a best in breed. I would look hard at Pulte, Centax and Toll as they tend to have properties in fairly affluent areas that haven't been particularly whacked. I'm talking out of my recollection here, but I would say that I'd stay away from florida and Homies with large amounts of condos. For now, I'm staying away from going long, as when a sector falls out of favor, you can have a great pick and be really frustrated as an investor (telecoms come to mind). One of the other difficulties I see here is that the high's that were set by these stocks are typically 2x their current share price. I can't think of a series of events to get them back to those levels anytime soon, so what would be the potential increase: 20-50%? A good return, but not the multi-bagger that you get with your small caps. Still you might be able to claim a hefty increase in a relatively large cap stock... Hope this helps. Let me know if you need another link to the article.