Why One Big Trader is Fading the Housing Rally

On Monday, one of the worst performing sectors was the homebuilders.

Why One Big Trader is Fading the Housing Rally

The SPDR Homebuilders ETF sold off 1.5 percent to close at its 50-day moving average. And the ETF saw heavy option volume, most of it in puts. Over 8 times the average daily put volume traded, and the put/call ratio was 12.8.

The biggest trade of the day was the purchase of 21,000 Jan. 24/22 put spreads for $0.42 each, which the trader did when the XHB was trading at $25.56. This is a bearish trade that profits if XHB is below $23.58 at January expiration — which would be a 7.7 percent decline over the next 67 days.

This spread will only realize its full value of $2.00 if XHB is below $22.00 at expiration. Since the trader spent $0.42, that would mean a profit of $1.58, or a 376 percent return on risk. However, if XHB is above $24.00 at expiration this spread will be worthless, and the trader will lose the entire $0.42 spent.

Data suggests that the U.S. housing market has bottomed, so why all the bearishness?

On Monday, XHB component D.R. Horton reported better-than-expected results — but the CEO's cautious comments on job growth hurt the stock and the sector. (Read More: Builders Warn on Housing.)

And last week, Zillow, an online realtor, guided below what the street was expecting for the fourth quarter. This comes in contrast to housing data, and suggests that momentum may be waning for the homebuilding sector.

Indeed, the XHB is up 45.6 percent year-to-date, so the slightest reason to be bearish is bound to cause some profit-taking, especially ahead of the uncertainty surrounding the fiscal cliff.

With that in mind, let's take a second look at the trade.

As we mentioned, this option trader's spread targets a move to $22.00 for the XHB, and this is currently the ETF's 200-day moving average. Whether we do, in fact, see a test of the 200-day is likely to be determined by the guidance that the rest of XHB's components provide.

Home Depot, one of the XHB's largest components, reported a beat on Tuesday morning and guided up, which is somewhat lifting the homebuilding sector after Monday's decline. (Read More: 'Pretty Powerful Backdrop' Ahead for Home Depot: Pro.)

If you want to get bearish exposure to the sector, consider Tuesday's strength as an opportunity. But be sure to use spreads like this one to keep risk fixed, and reward/risk ratios high, in the event that the 50-day moving average holds as support for the XHB.

Brian Stutland is the President of Stutland Equities and a contributor to CNBC's "Options Action."

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