Redwood Trust has failed to participate in this year's rally, but yesterday bullish option traders came out in force.
Call volume in the mortgage-finance stock surged to 1,600 times greater than average as a large investor snapped up 49,500 January 12.50 calls for $2.60, according to OptionMonster's real-time tracking systems. The bullish activity occurred the same session RWT gapped up by 3.04 percent, days after making a higher low and pushing above its 50-day moving average.
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The stock closed at a two-month high of $14.92 yesterday and apparently found support above a level where it peaked earlier in the month. Redwood is organized as a real estate investment trust and is designed to pay large dividends based on playing a steep yield curve.
The bullish stock and options activity came despite a lack of news on the company, which has a dividend expiration date today. Redwood has been showing improving financials, with shrinking loan-loss provisions for each of the last five quarters and smaller market losses on its holdings of securities.
The company would also benefit from higher long-term interest rates, which reduce the likelihood of homeowners refinancing their mortgages, according to its 10-K. Redwood last reported earnings on Nov. 4 and hasn't yet announced its next release date.
Overall in Redwood, calls outnumbered puts by 218 to 1.
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David Russell is a reporter and writer for OptionMonster.