PUT BUYERS BET ON A DECLINE IN REAL ESTATE
The put call ratio in the housing Real Estate ETF, IYR, has reached 19:1 as put buyers bet on a decline in housing Real Estate stocks. The IB options desk reports (from Thursday’s trading):
IYR – iShares Dow Jones U.S. Real Estate Index – Shares of the U.S. real estate exchange-traded fund have moved nearly 4.5% higher during today’s trading session to stand at $36.14. Contrarian option traders flooded the ETF, despite the surge in shares, and drove the put-to-call ratio up to more than 19-to-1. The favored approach taken by bearish investors today was the plain-vanilla put spread. The first of two trades up for discussion involved the purchase of 3,000 puts at the September 36 strike price for a premium of 2.00 apiece spread against the sale of 3,000 puts at the lower September 33 strike for 85 cents each. The net cost of the trade amounts to 1.15 and yields maximum potential profits of 1.85 per contract if shares slip to $33.00 by expiration. A much larger put spread was established further out in the January 2010 contract. The trade may have been the work of an investor seeking downside protection on a long position in the underlying. Otherwise, the trader responsible for the spread is hoping to amass profits on bearish movement in the stock. The transaction involved the purchase of 40,000 puts at the January 30 strike price for 1.97 each, spread against the sale of 40,000 puts at the lower January 25 strike for an average premium of 77 cents per contract. The net cost amounts to 1.20 to the investor who will realize maximum gains of 3.80 if the IYR declines to $25.00 by expiration. Shares would need to fall 20% from the current level in order for the trader to begin to amass profits beneath the breakeven point at $28.80.
I must be missing something. IYR, according to Yahoo:
Last Trade: 35.85
Trade Time: 4:00pm ET (July 31)
Change: Up 0.03 (0.08%)
Prev Close: 35.82
Open: 35.72
Day’s Range: 35.45 – 36.13
* * * *
I thought maybe you meant yesterday, but range was only 35.18 to 35.80.
When EXACTLY were these trades put on?
Sorry, this is from yesterday’s trading. I’ve correct it.
Yeah I don’t think the market is pricing in a huge decline. Perhaps it is a bad indicator because of lack of volume but here goes…
http://finance.yahoo.com/echarts?s=DMM#chart7:symbol=dmm;range=1m;compare=umm;indicator=dividend+volume;charttype=line;crosshair=on;ohlcvalues=1;logscale=on;source=undefined
I think I read somewhere that housing prices are rising because higher end homes are starting to go into foreclosure. Haven’t seen the detail to back that up though.
Sorry, I STILL don’t get it.
As commented earlier:
“I thought maybe you meant yesterday, but range was only 35.18 to 35.80.”
Even peak-to-trough, this is less than a 2% move, not the 4.5% referenced in your piece.
can i cover a few topics here?
(sorry for posting now, but if i post during work hours, well, the bank i work for would have cause to fire me and i have a mortgage to pay)
1. housing – within 10-15% of bottom, if not there yet – with the big wild card unemployment….no one buying with job insecurity, and no bidding wars without certainty of raises and bonuses at year end – and wait till summer is over and sales plummet as its too late to move to a new neighborhood for kids to start school in a new district
2. inflation – aint happening (for years) as there is way too much slack in manufacturing…what are factories running at 65%? and you yourself are posting the decline in rail – and again, unemployment….with 6 million outa work…why pay workers more…they are lucky enough to be employed, in fact screw them, no raises next year, and paltry (if any) bonus….what leverage do they have? there are no other jobs…so they will just be unhappy and guess what, they will just keep showing up for work day after day after day….trust me i see it….(a few ex-pats are slacking off day after day cause they have multi year contracts)
3. stock market – range bound….imho between 6000 and 1100….when does the worm turn each time, who the f knows….but the bull aint starting….for a few years….think about it….look around your neighborhood, is anyone unemployed? are your friends telling you how they just outbid someone for a house? any new BMWers flooding driveways? – have you heard someone say they cant take a vacation to aruba this year – the key to when the mkt is toppy is when you are having dinner with your friends and the first thing they say is….”i made back x% already”…kiss of death
4. auto sales….almost bought a H3, wow, $26k for a cool looking station car…but my clunker does not qualify…..sure hope they have this deal going on in january when my lease ends and when i find out if i get any bonus this year
5. economy – bank balance sheets running dry, more powder for next year, double dip recession is the fear talk now
6. commodity prices – nat gas fowards at $6.5, but prints at $3+…maybe we print sub $3 if the hurricane season is weak…but winter is comming….and you cant permit a coal fired plant…..my ‘guess’ is that nat gas stays below $4 for years…(look at lng receiving terminal capacity….sure aint being used, even with trinny liquifaction producing delivered NG at sub $3 to the US….but they do better sending it to europe for the premium
7. loan margins…high as heck
8. oil – well, cant put Nat Gas in cars, so oil can stay higher than the 6:1 heat rate ratio of a barrel vs 1000 ft^3….my guess, oil falls to $40
9. back to the mkt, aug, sept, oct……SnP falls to 820….but nov, dec, jan….back to 950…
10. thanks for an interesting site….and remember, the grand casino is open 5 days a week….
hey vfsvfl, the article was likely written mid-day and was referencing to the % change from the prior day’s (wednesday) close of $34.61. thursday’s close of $35.82 meant the price was up about 3.5%. but during mid-day the price could had been around $36.14 for the “nearly 4.5%” move.
TPC
I can’t believe you would make this mistake, but, the IYR is NOT a housing ETF. It is a commercial RE ETF. As you know there is a huge difference. Yes it includes some housing in the form of apartment REITs (only one in the top ten holdings though), but it’s not representative of the residential housing market by a long shot. I see this link made all too often though, and it’s very puzzling to me to see this basic mistake made over and over.
From Yahoo Finance:
TOP 10 HOLDINGS ( 41.47% OF TOTAL ASSETS)
Company Symbol % Assets
ANNALY CAPITAL MANAG NLY 4.83
BOSTON PPTYS INC BXP 3.46
EQUITY RESIDENTAL EQR 3.58
HCP, INC. HCP 3.39
HOST HOTELS & RESORT HST 2.94
PLUM CREEK TIM REIT PCL 2.85
PUBLIC STG PSA 4.94
SIMON PPTY GRP INC SPG 8.38
VENTAS INC VTR 2.75
VORNADO REALTY TRUST VNO 4.35
Not sure what the confusion is. The data is from Thursday when the fund spiked 4.5%….
http://finance.yahoo.com/q/ta?s=IYR&t=5d
Onlooker, you’re correct. I meant to say real estate rather than housing. Technically, there was no true housing ETF before the Case Shiller funds came out. All real estate funds are invested in companies related in some way to US housing or commercial real estate. Even the XHB which is widely thought of as a residential real estate fund is just large homebuilders and not a true play on the underlying real estate. Sorry for the error….I write a lot of crap every day. Sometimes the details get overlooked without intention….
I hate to nitpick, but the actual dollar amounts of these transactions don’t imply a truly sophisticated investor, so I am not sure we should care. The most expensive part of the trade, 40,000 X $1.97, would only be about $80,000, and even I might put on a trade of that much, even in puts, and I am just one semi-high net worth individual. Maybe I am missing something. I love your site, and you have some really, really good stuff here, but I just don’t see it for this one. Thanks for all of your insights, though.
Oops! Sorry, of course the puts I referenced are priced at $197, and the most expensive part of the trade would be about $8,000,000? Makes a big difference, and shows the perils of commenting before the coffee has kicked in. Thanks again for your insights.
I understand TPC. I’ve just seen the IYR referred to as a res housing ETF all too often and wanted to chime in to correct it. Of course people need to do their own due diligence.
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