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Why are Options Traders Bullish on Redwood Trust?

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.

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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Options Trading School:

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Redwood Trust Competes With:

Annaly Capital Management

Capstead Mortgage

iStar Financial

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David Russell is a reporter and writer for OptionMonster.

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