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

New and existing home sales surged to their highest levels in years during April, and traders are looking into housing stocks as a way to take advantage of the good economic news.

U.S. new-home sales posted their strongest month in over eight years while pending home sales rose 5.1 percent from March. As home prices rise thanks to demand, traders are suggesting two areas to look for investors keen on getting a foot in the housing stocks' door.

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

"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 (NYSE: WSM). 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 their shares rise 3 percent after late Wednesday's earnings announcement, which showed that Williams-Sonoma had beaten their share price and revenue estimates.

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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 that there are opportunities in the new homes focused market.

Gilbert points to luxury homes builder Toll Brothers (NYSE: TOL) as a sound bet, a recommendation from one of her analysts at Susquehanna.

"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.

The XHB finished the day at $34.01, a level it hadn't seen since January of this year. 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.

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