The Best Options Trading Strategy for This Housing ETF

The housing sector will likely remain in focus with a Fed meeting and tax reform looming

by Karee Venema

Published on Dec 5, 2017 at 2:03 PM

Shares of the SPDR S&P Homebuilders ETF (XHB) are trading lower today, after homebuilder Toll Brothers (TOL) reported disappointing fiscal fourth-quarter earnings and revenue. At last check, the exchange-traded fund (ETF) was down 1.3% at $43.58. The housing sector is likely to remain in focus in the near term, with the Fed expected to raise interest rates at next week's meeting and Republicans scrambling to get a tax reform bill to President Donald Trump's desk. Here's a closer look at XHB ahead of these potentially volatile events -- and why it might be a good time to sell options premium on the ETF.

Looking at the charts, today's negative price action runs counter to XHB's longer-term trend. The shares are up 28% year-over-year, and topped out at an 11-year high of $44.49 yesterday. As such, the fund's 14-day Relative Strength Index (RSI) closed Monday at 80 -- well into overbought territory -- suggesting the shares may have been due for a short-term pullback.

Regardless, short sellers are likely pleased with today's slide. Short interest on the housing ETF surged 23.78% in the two most recent reporting periods to 9.48 million shares -- the most since mid-September.

Meanwhile, in the options pits, short-term calls are preferred over puts by an unusual margin -- per XHB's Schaeffer's put/call open interest ratio (SOIR) of 0.90, in the 18th annual percentile. Some of this data is skewed by peak open interest at the January 2018 40-strike call, where 18,710 contracts reside. It's unclear if traders bought or sold these calls, but most of the open interest was added in late-January through mid-April, according to Trade-Alert.

In the front-month series, peak open interest is found at the December 40 and 41 calls, where 20,656 contracts collectively reside. While it's not easy to tell if these were initiated as bullish or bearish trades, they were opened in mid-September when XHB was trading near $39.

Those currently wishing to place short-term bets on XHB may want to consider a premium-selling strategy, considering the ETF's Schaeffer's Volatility Index (SVI) of 18% ranks higher than 82% of all comparable readings taken in the past year -- pointing to elevated volatility expectations. Plus, the fund's Schaeffer's Volatility Scorecard (SVS) of 7 indicates the shares have historically underperformed over the past year, relative to what the options market has priced in.

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