Often we are faced with two or more stocks that fit our entry criteria, with a decision to make as to which is more likely to give us a desired result.
There is an interesting situation in the home-building sector with Hawkeye throwing up potential long entries in the three main stocks we would consider as being suitable for a bought call options trade.
If all three are equally fitting in terms of a fit for entry what then can we look at to make the decision as to which one to plant our trading flag and $$$?
As decisions go in similar situation, this is considerably harder than would normally be the case, but from an educational perspective this is good example.
Your mission: Look at the process used to help you in the future when faced with a similar challenge. Ultimately you must of course plant your flag in one!
The three stocks LEN, PHM and DHI charts are below over the three time-frames we look at. Then view the table below for our entry price and then the other things we are looking at to help with our decision.
DHI (D R Horton)
Before we discuss each in more detail, what can we explore to help us ..the table below outlines some of the key factors we could take into account
Armed with the information we can then assess as follows (remember it is the general process that is important not applicable JUST to this specific set of stocks):
We have placed an entry for a bought call position of $42.50 on the underlying stock, based on the desire for a move over the pivot high at this level from last week.
Although more likely to be already out of the position the ex-dividend date in the 2nd week in July Reality is that the dividend is only 4c/share and hence would not be a barrier to entry. The advantage of a longer time to earnings could be seen as advantageous and the upside potential to the next obvious potential resistance is advantageous.
The volume picture over the last few trading days has been less compelling although still fits criteria.
We have placed an entry for a bought call position of $20.50 on the underlying stock, based on the desire for a move over the pivot highs at this level from earlier in the month.
Of the three this performed least favorably in the last session. However since all have got to do some work prior to entry this becomes less relevant than it would be if they were entries now. The closer proximity of earnings could be seen as a disadvantage compared to LEN. The tighter bid/ask spread is only marginally advantageous but nevertheless would become more important if considering multi-leg strategies. There are weekly options available.
The volume picture is one of increasing buying volume which is a slightly better profile than LEN but there was unusually high volume 2 trading session ago which could be viewed with suspicion.
We have placed an entry for a bought call position of $24.87 on the underlying stock, based on the desire for a move over the pivot high at this level from earlier in the month.
Like PHM there are weekly options available and the bid/ask spread is tighter than LEN although earnings may interfere with position also if in it for the longer term.
The volume picture is one of increasing buying volume which is a slightly better profile than LEN or PHM with steadily increasing volume as we approached the current price point.
In reality and the decision
In reality, all three, if meeting entry criteria, all will fit HK 3-step as entries. Additionally of course, it may be that the market makes the decision as all three have a little work to do before an entry would be actioned.
The dividend payments of all of these is not substantial and is unlikely to impact significantly on the underlying price movement on ex-div date.
Again there is little to choose between bid/ask spread unless of course considering a multi-leg position.
Let’s assume for a moment all hit entry at the same time, it may be that the last hour close towards the top of the bar may be our decision maker. With little to choose between these from short term fundamental and technical pictures, purely on the volume profile alone would encourage us to choose DHI.
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