Bearish Home Builder Trade

Home builders and related stocks have had a rough start to 2014, with the iShares Home Construction ETF down 5% YTD, and some home builders faring much worse.  The average homebuilder that we track is down over 10% YTD, and we see continued risks in this sector in the short term based on recent new home sales data:  http://abcnews.go.com/Business/wireStory/sales-us-homes-plunge-145-perce...

The industry may be in a recovery and uptrend at a macro level, but in the short term we see opportuniteies to make money on a continued pullback.  While weather may have had a lot to do with the weak home sales figures in March, we also believe that the first-time home buyer isn't buying anytime soon.  This will create a ripple effect where people who want to move up into a bigger home can't sell the start home that they are in today.  This trend may not last for years, but it won't revert to normal overnight.

Toll Brothers (TOL) is trading $33.70, which is down 16% from its 52 week high, and sports a PE ratio of 29 which is amongst the highest in the group.  It recently also broke its 200 day moving average, and it's next level of support is around $32.50.

If the overall market trades sideways to lower in the current range that it is in, we may see continued weakness in stocks that trade at high PE's relative to their peers and industry.  

We are buying the TOL May $33 Puts for .58 cents.  With the stock trading at around $33.70 right now, any decline in the stock will increase the value of our puts, and with 23 days left until expiration we will not hold this trade for very long.