Put Trading Surges on XHB Amid Housing Sector Weakness

It's been a terrible week for the housing market

Aug 24, 2017 at 11:31 AM
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It's been a rough stretch for the SPDR S&P Homebuilders ETF (XHB)The exchange-traded fund (ETF) gapped below the formerly supportive 50-day moving average back on Aug. 10, as geopolitical tensions between the U.S. and North Korea were heating up, and this week has only added salt to its wounds. Specifically, Lowe's stock pulled back after the home improvement retailer released disappointing earnings, while recent reports for new and existing home sales have been strikingly weak. At $37.41, XHB is on pace for its lowest weekly finish since mid-April, and options traders are betting on extended downside in the near term. 

xhb etf

During the past 10 days at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the security has accumulated a top-heavy put/call volume ratio of 8.38, meaning more than eight long puts have been opened for every long call -- albeit amid low absolute volume. This reading ranks in the 88th annual percentile, signaling such interest in put options relative to call options is very unusual. 

This bearish trend is continuing today. Roughly 2,600 XHB puts have traded, compared to fewer than 40 calls. This is well above the average daily put volume of just 654 contracts. Much of the action has centered at the weekly 8/25 37-strike and 9/1 37-strike puts. Data isn't clear, but this could be the result of a trader initiating a long put calendar spread, expecting XHB to hold above the strike through expiration at tomorrow's close, but breach $37 by next Friday's close.

Regardless, data suggests it's a good time to target short-term SPDR S&P Homebuilders ETF options. For example, the security has a Schaeffer's Volatility Index (SVI) of 15%, which ranks in the 21st percentile of its annual range. This means volatility expectations are relatively low for near-term contracts at the moment, a potential boon to premium buyers. 

Elsewhere, it may be worth watching short interest levels on XHB. Currently, 8.4 million shares are controlled by short sellers. Since mid-2013, this level has acted as a bottom for short interest on the homebuilding ETF, and in the most recent reporting period, short interest rose by 6%. 

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