Homebuilders Draw Bearish Option Trades

At least one big investor is getting nervous about the homebuilders.

OptionMonster’s tracking systems detected a surge of put volume yesterday in PulteGroup and Ryland Group as investors braced for potential pullbacks in the next two months.

Some 26,000 April 8 puts were bought in PulteGroup, mostly for $0.41, against open interest of just 1,572 contracts. Activity in Ryland focused on the April 18s, which priced for $1.15 as the name saw almost 13,000 change hands — nearly triple the previous open interest.

These long puts lock in the amount investors will get by selling shares in the companies, so they provide insurance against lower prices. They can also provide significant leverage in the event of a decline and are safer than simple short-selling of the stock because the risk is limited to the price of the puts.

PulteGroup shares rose 0.47 percent to $8.53 yesterday, and Pryland shares gained 0.61 percent to $18.22. Both stocks have been climbing along with other homebuilders as traders bet that the housing market is finally starting to improve.

That sentiment could be challenged today when the S&P Case-Shiller Home Price Index is released at 9 a.m. ET.

Total activity the names was 12 times greater than average for Ryland in the session and five times above normal in PulteGroup. The bulk of the option trading occurred in less than two minutes in both companies, suggesting that it was the work of a single large investor.

—Russell has no positions in PHM or RYL.

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David Russell is a reporter and writer for OptionMonster.