Traders Rally Around
Home-Builder Stocks
by Tennille Tracy
From The Wall Street Journal Online
April 04, 2008
Options traders are preparing for the housing market to level off, and perhaps start to rebound.
Home-builder stocks have started to post gains after suffering major declines in recent months. The SPDR S&P Homebuilders, an exchange-traded fund that tracks home builders in the S&P Total Market Index, closed at a six-month high on Wednesday, at $23.66.
Options traders responded with a similarly upbeat tone in XHB, trading 11,600 call contracts that allow them to buy the shares, compared with just 7,700 put contracts, which allow them to sell.
Traders congregated around April calls that allow them to buy XHB for $23. Priced at $1.45, the contracts start to make money if the shares climb above $24.45 before expiration on April 18.
Traders with more long-term views took up positions in June calls that allow them to buy XHB for $28. Priced at 85 cents, those contracts make money if the shares climb above $28.85.
"The belief is that home prices, while they might not be going up, might have leveled off," said Joe Kinahan, chief derivatives strategist with Thinkorswim Inc.
Perhaps lending to Wednesday's momentum, Federal Reserve Chairman Ben Bernanke delivered a speech to Congress, saying "growth is expected to proceed at or a little above its sustainable pace in 2009, bolstered by a stabilization of housing activity, albeit at low levels, and gradually improving financial conditions."
One home builder in particular, Ryland Group Inc., saw the highest level of trading in calls since October 2007, said Rebecca Engmann Darst, an equity options strategist with Interactive Brokers.
Ryland closed Wednesday at $35.35, down slightly from Tuesday's eight-month-high of $35.40.
Traders gathered around April $32.50 calls, which are priced at $3.60 and make money if Ryland jumps above $36.10. It appears, however, that most traders sold those contracts, taking advantage of a spike in premium, and then took up positions in October $42.50 calls, experts said.
Traders also appeared to take bullish stakes in D.R. Horton, picking up 18,700 call contracts as opposed to just 1,800 puts, and Pulte Homes, picking up 5,500 puts and just 1,200 calls, according to Track Data.
However, looking at the session's bullish activity, Kinahan added a note of caution and said the market has attempted to forecast a rebound in housing before -- and with little luck. The most recent S&P/Case-Schiller Home Price Indices, published March 25, showed that home prices continued to decline in 19 of 20 major U.S. cities.
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