Homebuilders draw downside trades

By David Russell,

Shutterstock photo

At least one big investor is getting nervous about the homebuilders.

optionMONSTER's Depth Charge tracking system detected a surge of put volume yesterday in PulteGroup and Ryland as traders braced for potential pullbacks in the next two months.

Some 26,000 April 8 puts were bought in PHM, mostly for $0.41, against open interest of just 1,572 contracts. Activity in RYL focused on the April 18s, which priced for $1.15 as the name saw almost 13,000 change hands--nearly triple the previous open interest.

These long puts lock in the amount investors will get by selling shares in the companies, so they provide insurance against lower prices. They can also provide significant leverage in the event of a decline and are safer than simple short-selling of the stock because the risk is limited to the price of the puts. (See our Education section)

PHM rose 0.47 percent to $8.53 yesterday, and RYL gained 0.61 percent to $18.22. Both stocks have been climbing along with other homebuilders as traders bet that the housing market is finally starting to improve.

That sentiment could be challenged today when the S&P Case-Shiller Home Price Index is released at 9 a.m. ET.

Total activity the names was 12 times greater than average for RYL in the session and 5 times above normal in PHM, according to our Depth Charge system. The bulk of the option trading occurred in less than two minutes in both companies, suggesting that it was the work of a single large investor.

(A version of this post appeared on InsideOptions Pro yesterday.)

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Copyright © 2010 OptionMonster® Holdings, Inc. All Rights Reserved.

This article appears in: Investing Options
Referenced Stocks: PHM , RYL

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