Markets

Caution reigns in key housing fund

Housing has been strong, but now traders want protection.

optionMONSTER's Depth Charge monitoring program detected the purchase of 8,000 October 34 puts in the SPDR S&P 500 Homebuilders Fund for $0.55. A matching number of October 31 puts was sold for $0.10. There was barely any open interest at either strike when the session began, which indicates a new vertical spread was initiated.

The trade cost $0.45 and will return 567 percent if XHB closes at $31 or lower on expiration. The strategy is designed to leverage a drop of a specific size and is a common hedging technique. (See our Education section)

XHB is down 3.58 percent to $34.47 in afternoon trading. It's one of the better-performing industry funds this year, with a gain of 1 percent since January while the S&P 500 is down 8 percent over the same period. In addition to weakness in broader market, today's drop may result from weak existing-home sales for August.

XHB's holdings include homebuilder D.R. Horton, mattress maker Tempur Sealy and wallboard provider USG. That makes it more diversified than a major competitor, the iShares U.S. Home Construction Fund (ITB), which focuses almost entirely on builders.

Total option volume in XHB is quadruple the daily average so far today, according to Depth Charge, with puts outnumbering calls by a bearish 5-to-1 ratio.

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.


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

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