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Option Idea of the Week: The Ryland Group (RYL)

Despite signs of a housing recovery, RYL remains plagued by pessimism

by 2/15/2013 1:10 PM
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Housing stocks have been on fire for over a year now, with the SPDR S&P Homebuilders ETF (XHB) skyrocketing roughly 140% since mid-October 2011. However, despite signs of a sector-wide recovery -- including RealtyTrac data that showed foreclosure-related filings fell a year-over-year 28% to a five-year low last month -- Wall Street remains wary. Among uptrending stocks surrounded by skepticism is The Ryland Group, Inc. (NYSE:RYL - 38.78), which looks ripe for a contrarian bullish play.

Technically speaking, RYL has nearly quadrupled since mid-October 2011, ushered higher atop its 10-week and 20-week moving averages. In fact, the stock touched a five-year peak of $43 in late January, after reporting stronger-than-anticipated quarterly earnings and a 64% spike in new orders. More recently, the shares have pulled back to the former of the aforementioned trendlines, suggesting now could be an opportune time to jump in on RYL's longer-term uptrend.

Weekly Chart of RYL since October 2011 With 10-Week and 20-Week Moving Averages

Despite its prowess on and off the charts, RYL remains plagued by pessimism. Short interest accounts for 15.8% of the stock's total available float, and would take nearly six sessions to unwind these bearish bets, at the equity's average pace of trading. As the stock extends its upward momentum, a short-squeeze situation could propel RYL even higher.

Meanwhile, seven out of 12 analysts maintain "hold" or worse opinions, and the consensus 12-month price target on the security stands at $40.29 -- representing expected upside of just 3.9% to RYL's current share price. As the brokerage bunch capitulates to the bullish camp, a wave of upgrades or a round of price-target hikes could lure more buyers to this outperformer.

Traders expecting RYL to muscle even higher should consider buying the stock's in-the-money April 33 calls, which were last asked at $6.30. What's more, the equity's Schaeffer's Volatility Scorecard (SVS) of 76 suggests RYL options are attractively priced compared to the probability of an outsized move on the charts, suggesting now is an appealing time for option buyers.


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