Options Traders Bombard Housing Stocks After Republican Tax Plan

XHB, ITB, HD, and TOL are all trading lower after recently hitting notable technical milestones

Nov 2, 2017 at 3:04 PM
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Housing stocks are spiraling today in reaction to the Republican tax plan. Specifically, the newly released proposal includes a provision to cap the mortgage interest rate deduction at $500,000 -- half the current limit. Among those taking it on the chin are the SPDR S&P Homebuilders ETF (XHB) and the iShares U.S. Home Construction ETF (ITB), while individual stocks Home Depot Inc (NYSE:HD) and Toll Brothers Inc (NYSE:TOL) are also wallowing in red ink. Here's a closer look at how these homebuilding names are performing -- and the accelerated options activity that's occurring as a result.

XHB Put Volume Nears Peak Levels

XHB was down 3% at its session low, but found a foothold atop its 30-day moving average -- a trendline that caught a late-September retreat, as well. The exchange-traded fund (ETF) has since pared these losses to 2% to trade at $40.59, but remains nearly 20% higher on a year-to-date basis, and hit an 11-year high of $41.59 yesterday.

Put players are blasting XHB today, with 8,950 contracts on the tape -- nearly nine times what's typically seen, and volume pacing in the 98th annual percentile. By contrast, call volume is running at nearly double the norm, though just 1,563 contracts have traded. Traders appear to be buying to open the weekly 11/3 40- and 40.50-strike puts, as well as the November 39 put, betting on bigger losses for the homebuilding ETF over the next few weeks.

ITB Shares Hit a Decade High Before Turning Lower

ITB hit a 10-year high of $40.19 out of the gate, but was last seen down 1.6% at $39.36. The fund's long-term trend has been higher, as evidenced by its year-over-year gain of 55.4% -- with today's pullback being contained by familiar support at its 10-day moving average.

In the options pits, roughly 12,750 calls and 6,850 puts have changed hands on ITB so far -- more than six times the expected intraday amount. One trader may have initiated a long call spread at the April 39 and 41 strikes, betting on the shares to settle right at $41 at April options expiration.

Home Depot Put Buyers Bet on Bigger Losses

Home Depot stock plunged headfirst into its 50-day moving average earlier -- a rising trendline that helped usher the shares higher in the first half of 2017 -- last seen down 1.7% at $162.60. Nevertheless, the shares are still boasting a 21.3% year-to-date lead, and notched a record high of $167.94 one week ago.

HD options volume has swelled to two times what's typically seen at this point in the day, with 45,500 contracts on the tape -- on track to settle in the 92nd annual percentile. The weekly 11/3 162.50-strike put is most active, and it looks like new positions are being purchased here. If this is the case, traders expect Home Depot's losses to accelerate through expiration at tomorrow's close.

TOL Stock Upgraded Amid Selloff

Toll Brothers stock topped out at a 12-year peak of $46.63 yesterday, but has plunged 5% today to trade at $44.31. The shares are still up an impressive 42.9% year-to-date -- and earned an upgrade to "overweight" from "sector weight" at KeyBanc earlier this afternoon.

Put volume has surged to 64 times what's usually seen at this point in the day, with 15,293 contracts exchanged -- closing in on TOL's Feb. 2 52-week peak of 18,035 puts traded in a single session. Most of the action has centered at the December 45 put, where new positions are being initiated. Data from Trade-Alert points to selling activity, though with a wide bid-ask spread, traders could also be purchasing the at-the-money puts.


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