Calls constructive on homebuilders


Homebuilders have been trying to rebound, and one large investor is sticking with the group.

optionMONSTER's Heat Seeker monitoring program detected heavy call volume in the iShares U.S. Home Construction exchange-traded fund, which holds positions in builders such as Lennar, D.R. Horton, and PulteGroup. Activity focused on the short-term Weekly 23 calls, with 17,343 of the contracts expiring June 27 sold for $1.25 and an equal number bought in the calls expiring July 25 for $1.53.

Calls lock in the price where investors can buy a stock, allowing them to position for gains at limited cost. Volume was below open interest in the nearer-dated options today, which suggests that an existing long position was closed and rolled forward in time.

In the case of ITB yesterday, making the adjustment cost $0.28 and provided the investor with an additional month of upside exposure, while protecting him or her from a near-term pullback because the position's delta was lowered to 0.72 from 0.84. (See our Education section)

The ITB fell 0.97 percent to $24 yesterday but is up 4 percent since mid-May. While housing data has been mixed, recent reports from the Federal Reserve and MBA show increased mortgage activity. Next week brings more related numbersl, with NAHB's homebuilder-sentiment survey due on Monday and housing starts and building permits on Tuesday.

Total option volume is 16 times greater than average so far in the session, with calls outnumbering puts by more than 77 to 1.

Disclosure: I am long ITB shares.

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