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Put Options Pop on Housing ETF Ahead of Fed

Breaking down a bear put spread options strategy on XHB

Jun 13, 2017 at 1:47 PM
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In the past few years, real estate stocks have outperformed during Fed meeting weeks, as the central bank more often than not has maintained the status quo of rock-bottom rates. However, the Fed is widely expected to raise interest rates when the committee emerges from its two-day meeting tomorrow, and it looks like one options trader is betting on a short-term pullback for housing stocks, via the SPDR S&P Homebuilders ETF (XHB).

XHB Options Active Ahead of Fed

At last check, XHB puts are crossing at 22 times the average intraday pace, with roughly 15,000 contracts exchanged. That's about 10 times the number of XHB calls traded so far, though call volume on the homebuilders exchange-traded fund (ETF) is running at four times the norm. Further, put volume is pacing to hit the 97th percentile of its annual range.

Options Trader Anticipates a Pullback for XHB Shares

Most of the put activity is attributable to a spread in the July series. Specifically, it looks like one trader may have bought to open 6,000 XHB July 38 puts for $0.48, then helped fund the position by selling to open an equal number of July 36 puts for $0.12 each. The bear put spreads were established for a net debit of $0.36 apiece, or $216,000 total (debit * number of spreads * 100 shares per contract).

The speculator will make money if XHB breaches $37.64 (bought strike minus net debit) within the options' lifetime, which ends at the close on Friday, July 21. Further, the options trader's profit will increase from this breakeven point down to $36, at which point gains are capped at $1.64 ([difference between strikes] - net debit), or $984,000 total, since the sold puts would move into the money.

At last check, the SPDR S&P Homebuilders ETF is 1.1% higher at $38.68 -- a new two-year high. Should XHB shares extend their uptrend -- the fund has rallied more than 14% in 2017 -- the most the options trader stands to lose is the initial premium paid for the spread. That's quite a decent risk/reward profile, in fact, as the trader's profit potential is more than four times' his or her maximum risk.

Now is an opportune time to roll the dice on XHB's short-term options, too. The ETF sports a Schaeffer's Volatility Index (SVI) of 13%, which is higher than just 10% of all other readings from the past year. In other words, XHB's short-term options are attractively priced right now, from a historical volatility standpoint. In the same vein, XHB's 30-day at-the-money implied volatility of 13.5% is within striking distance of an annual low.

XHB Staring Up at Former Ceiling

Aside from a potential post-Fed slip, the speculator could also be betting on familiar resistance for XHB. Shares of the homebuilder ETF are within a chip-shot of their August 2015 all-time high of $39.22, and the $37-$39 neighborhood has been a speed bump for XHB for more than two years. Further, the overhead $40-$41 area represents a 50% premium to XHB's 2016 lows near $27.

homebuilders etf XHB chart


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