Meritage Homes Corp.'s (MTH: sentiment, chart, options) put volume has spiked to more than 16 times the stock's daily average this morning, with no discernible news driving the activity. Specifically, more than 23,000 puts have changed hands on the security so far, compared to MTH's average put volume of 1,449 contracts, according to our Intraday Volume Explosion List. The most popular strike by far is the deep in-the-money August 17.50 put.
Diving into this activity reveals that the majority of MTH's put volume on the session has crossed on this back-month strike. More than 20,000 contracts have traded, versus open interest of just 440 contracts. What's more, nearly all of this volume traded in six blocks, totaling 19,960 contracts, on the NYSE Arca. These blocks changed hands at 10:12 a.m. Eastern time for the ask price of $2.73. Given that this volume far exceeds open interest at the August 17.50 strike, it seems likely that these blocks were bought to open as the initiation of a long put position on MTH.
The Anatomy of a Meritage Homes Long Put Position
The trade breaks down as follows: The trader bought 19,960 MTH August 17.50 puts for the ask price of $2.73. The total debit incurred for entering this position would be $5,449,080 -- (2.73 * 100) * 19,960 = $5,449,080. In order for these purchased puts to reach breakeven, MTH would need to fall roughly 8.7% to $14.77 per share, from Tuesday's close of $16.19 per share, when the options expire on August 21. At last check, MTH was down 8% at $14.88 per share. The maximum loss on this position is limited to the initial investment of $5,449,080.
Below is a chart for a visual representation of returns for a purchased MTH August 17.50 put:
Implied Volatility
Rising implied volatility is a boon for a long put position, as it lifts the value of the purchased option, thus increasing the potential payout when the position is sold to close. Currently, implied volatility for the MTH August 17.50 put rests at 79%, which is higher than the stock's two-month historical volatility of 75.71%. This skew means that the August 17.50 puts are relatively expensive at the moment.
Final Thoughts
On a final note, MTH is expected to release its quarterly earnings report near the end of July; the company has yet to set an official date. Currently analysts are expecting a loss of 72 cents per share from the homebuilder. As one might expect, implied volatility has begun to shoot higher for MTH heading into the event. On July 2, the stock's Schaeffer's Volatility Index (SVI) arrived at 65%, compared to its current reading of 78%. Along these lines, the trader buying the aforementioned 19,960 August 17.50 puts may not be entirely bearish toward the company. Instead, by entering such a position ahead of earnings, the trader may be able to capitalize on upward pressure on options prices due to rising implied volatility, thus closing the position out with a profit without a major downside move in the equity.
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