The $7 million bet that homebuilders could collapse

The bears are about to bulldoze the homebuilders — according to one trader.

In an eyebrow-raising wager Wednesday, someone purchased 15,000 of the XHB Homebuilder ETF August 34-strike puts for 45 cents each. Since one options contract accounts for 100 shares of stock, this is a nearly $7 million bet that shares of the XHB will fall below $33.55 — or 5 percent — by next month. The ETF is already down more than 11 percent from its 2016 high hit June 9.

"This [bet] actually makes a lot of sense, because options prices are down in the homebuilder ETF right now even though we have a lot of home sales and homebuilder data coming out next week," Optimize Advisors co-founder Mike Khouw said Wednesday on CNBC's "Fast Money."

Most notably, said Khouw, are earnings reports from D.R. Horton and PulteGroup — which are among the top holdings in the ETF — next Thursday before the opening bell.

The options market is anticipating a more than 5 percent move in either direction for D.R. Horton and a 4 percent rally or decline for PulteGroup. If both of these implied moves pan out, it could represent a nearly $20 billion shift in market cap for the XHB.

Options traders calculate the implied move for equities by measuring a particular stock's so-called straddle — or at the money put and call. The amount of the straddle typically captures market makers' expectations for how much a stock is going to move.

"To me, when you consider [the XHB] was as low as $31.40 recently, this is a pretty cheap way to hedge your bet," added Khouw. The XHB is up more than 75 percent from its February low.

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Host Bio

  • Melissa Lee

    Melissa Lee is the host of CNBC's “Fast Money” and “Options Action.”

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