Markets

Homebuilders draw bearish trade

Homebuilders are attempting to fight their way back after a big selloff, but one investor is positioning for another push to the downside.

optionMONSTER's Depth Charge tracking system detected bearish activity in the iShares Dow Jones U.S. Home Construction exchange-traded fund ( ITB ). A block of 1,200 August 12 puts was purchased for an average premium of $0.525. At about the same time 2,000 August 11 puts were sold for $0.125 against existing open interest.

ITB Chart

The transaction was probably a so-called ratio spread, where more contracts are sold than bought in order to reduce the cost basis and enhance leverage. If that was the trade, the investor owns August 12 puts for a net $0.32 each, which will let him or her leverage a modest decline to $11. But their gains will erode below that level because of the larger short position in the downside contracts.

ITB rose 2.4 percent to $11.95 in afternoon trading and is up 9 percent in the last month. The fund, which has positions in homebuilders such as NVR, PulteGroup, and D.R. Horton, lost 26 percent of its value in May and June as investors unloaded stocks tied to the health of the U.S. consumer.

Another possible explanation for today's option trade is that a protective position in the August 11 puts was rolled up to the 12 strike. That would also be bearish because the investor paid money to increase downside exposure.

Overall options in ITB is nine times greater than average so far today, with the Depth Charge showing puts at 98 percent of the activity.

(Chart courtesy of tradeMONSTER)

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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