Tags: housing | ETF | options | construction

Bearish Housing Bets Building on Interest Rate Concerns

Wednesday, 24 September 2014 08:31 AM

Traders are accumulating options to protect against losses in an exchange-traded fund that tracks housing stocks, speculating the homebuilding recovery may be threatened by an increase in interest rates.

The cost of puts conveying the right to sell the SPDR S&P 500 Homebuilders exchange-traded fund reached the highest level in 14 months relative to bullish contracts, according to three-month data compiled by Bloomberg.

Investors are growing concerned that the housing recovery may be derailed when the Federal Reserve increases its benchmark rate following a six-year stretch near zero percent, according to Ryan Detrick at See It Market. Shares of the ETF have tumbled 9.1 percent this year after almost doubling in 2012 and 2013.

“There’s that bet against the housing recovery and the data we’ve seen confirms that to a degree,” Detrick, a Cincinnati-based market strategist at the investment research firm, said in a phone interview. “If the stocks can’t do well in a rate-friendly environment, how well can they do when rates eventually go higher?”

Stalling Engine

The ETF, whose largest holdings include Home Depot Inc., Lennar Corp. and Whirlpool Corp., has tumbled for four straight weeks. The fund is down 12 percent from an almost seven-year high in February.

Housing starts slumped 14 percent to an annual pace of 956,000 in August after reaching the highest level in almost seven years, Commerce Department data showed Sept. 18. Those figures were at odds with a report the previous day that showed builder confidence rose in September to the highest level since 2005.

An expanding job market and six years of low interest rates have aided the housing recovery, making more Americans able to afford a house amid cheaper borrowing costs and higher employment. Still, housing starts are less than half their peak annual rate of almost 2.3 million in 2006.

“We’ve got the engine running at half its historical pace,” Andrew Wilkinson, chief market analyst at Interactive Brokers LLC, said by phone from Greenwich, Connecticut. “If you were to take away the leg of support, ultra-low interest rates, how will the homebuilders fare? There’s rationale in being potentially bearish.”

Shorts Flee

Options betting on a decline in the ETF cost 4.9 points more than contracts wagering on a rise, according to three-month data compiled by Bloomberg. The spread, known as skew, increased to 5.7 points on Sept. 22, the widest since July 2013.

Traders own more than four bearish contracts on the fund for every bullish one, almost double the 2.1 average put-to-call open interest ratio over the last 12 months. Nine of the 10 options with the highest ownership are puts.

The last time three-month skew reached a peak on the ETF was on April 25, 2012, when puts cost almost nine points more than calls, the most since 2008. The ETF rallied about 6 percent in the following week then plunged 14 percent by June 4 of that year. The retreat was short-lived, and the ETF recovered by August.

Homebuilder stocks should fare well these days as long as inflation stays muted, according to Mark Sebastian, founder of Option Pit LLC, a Chicago-based education and consulting firm. The Fed’s decision last week to maintain interest-rate guidance and raise its federal funds rate estimates boosted the dollar even after a report showed U.S. consumer prices unexpectedly fell in August for the first time in more than a year.

‘Bearish Play’

“If your real belief is interest rates are going higher, you should be bearish in these names,” Sebastian said. “I would probably sell puts to people on weakness. With the rally in the dollar against the euro and yen, where is the inflationary pressure? I don’t see it.”

The Bloomberg Dollar Spot Index has surged 5.4 percent in the third quarter. The U.S. currency has increased versus all 16 of its most-traded peers over the period, rising more than 6 percent against the euro and yen.

The Chicago Board Options Exchange Volatility Index jumped 9.1 percent to 14.93 yesterday, while its European counterpart, the VStoxx Index, rose 12 percent to 17.77.

Contracts expiring in December with a $26 strike price on the homebuilder ETF are the most-owned, data compiled by Bloomberg show. That’s betting on a 14 percent slump in the fund’s shares in about three months.

“There’s no more direct beneficiary or industry penalized by interest rates than homebuilders,” Joe “JJ” Kinahan, chief strategist at TD Ameritrade Holding Corp., said. “That’s one of the reasons we’ve seen such bearish options trades and you’ll probably see the pattern repeat itself.”

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Traders are accumulating options to protect against losses in an exchange-traded fund that tracks housing stocks, speculating the homebuilding recovery may be threatened by an increase in interest rates.
housing, ETF, options, construction
Wednesday, 24 September 2014 08:31 AM
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