A bearish bet on homebuilders that profits if the consumer starts to weaken

With some major consumer discretionary names trading closer to their 52-week lows even as equity markets print new all-time highs, there are growing risks that the consumer is weaker than the economy suggests. Recent weakness in the homebuilders, which are dependent on the consumer, suggests that they may be heading in the direction of the discretionary sector. This presents an opportunity to add short exposure via options. If we look at SPDR S & P Homebuilders ETF (XHB) , we see that it has continued to trade in a range between $100 and $110 over the past 4 months, however the relative performance of XHB to the S & P 500 has started to underperform recently. This suggests that XHB is likely to revisit the bottom of the trading range and potentially break below it. And if we look at DR Horton (DHI) , the largest of the homebuilders, it has recently traded in a similar range between $140 and $160 over the past 6 months, but the relative performance to its industry is poor and near its 52-week lows. This weakness suggests that it will revisit the $140 support level and potentially break lower, especially as momentum has recently turned negative. Now looking at the business, DHI trades at 10.5 times forward earnings, which is the upper bound of its historical average over the past 5 years. With some of the slowest expected EPS growth of only 4% among its peers, these valuations look start to look expensive as 10-year yields climb above 4.5% again. The trade With an implied volatility rank of 37% via Options Play data, the options are somewhat expensive. So I’m going to use the June 28 weekly expiration and buy the $145/$135 put vertical at a $3.82 debit. This entails: Buying the June 28 $145 Puts @ $5.60 Selling the June 28 $135 Puts @ $1.78 Using a put vertical spread allows me to offset the cost of buying a straight put by giving up any downside below the long put that I purchased. My total risk on this trade would be $382 per contract if DHI is above $145 at expiration and my maximum gain is $618 per contract if DHI is below $135 at expiration. DISCLOSURES: (None) THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.