With housing heating up, here’s how to play the homebuilders

After new and existing home sales surged to their highest levels in years during April, traders are looking for opportunities in housing stocks.

As home prices rise, traders are suggesting two areas for investors to get a foot in the housing stocks' door.

On Thursday, S&P Investment Advisory equity chief investment officer Erin Gibbs said her team was focused on retail stocks in the S&P 500 Homebuilders ETF (XHB).

The XHB finished the day at $34.01, a level it hadn't seen since January. Meanwhile, analysts don't appear particularly bullish — the average analyst price target implies upside of just 4.5 percent from current prices, according to Gibbs.

"If you delve into the homebuilders, the ones that look like they have real opportunity are more of those retailing home-goods type of companies," she said on CNBC's "Trading Nation." "One of our absolute favorites is Williams-Sonoma. They've been doing really well and have had very positive surprises."

Williams-Sonoma has been a favorite among traders even as other big name retail stores have fallen. The home goods company saw its share prices rise 3 percent after late Wednesday's better-than-expected earnings announcement.

Read MoreMillennials may not be buying homes, but more are selling them

Given that the new home sales acted as a powerhouse in driving the U.S. housing market, traders are also recommending companies that focus on that section of the market. While Stacey Gilbert, head of derivative strategy at Susquehanna Financial, is surprised at the lack of options activity among housing stocks, she believes there are opportunities in new-homes-focused companies.

Gilbert points to luxury homes builder Toll Brothers as a sound bet.

"We do see upside here, we do think Toll Brothers is trading from a valuations perspective at historical trough levels both price to earnings and price to book," she said on Thursday's "Trading Nation."

"The new home sales that we're talking about, they are helped when the existing home sales also are positive. That helps these homebuilders, particularly for companies like Toll Brothers."

To play the Toll Brothers stock from an options perspective, Gilbert recommends owning the September 27-strike calls.

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Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell (M-F, 3PM-5PM ET).   In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

Follow Michael Santoli on Twitter @michaelsantoli

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