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Calls constructive on homebuilders

Mike Yamamoto (mike.yamamoto@optionmonster.com)

Traders are betting on a near-term rebound in shares of the iShares U.S. Home Construction Fund.

optionMONSTER's Heat Seeker system detected the purchase of more than 7,500 August 22 calls for $0.80 and $0.85 yesterday afternoon. Open interest in the strike was a mere 7 contracts before the trades appeared, showing that this is fresh buying.

These in-the-money long calls lock in the price where the stock can be purchased through mid-August no matter how far it might climb. They could be sold earlier at a profit if premiums rise with a rally before then, providing potentially significant leverage, but the contracts will quickly lose value if shares drop by expiration in about three weeks. (See our Education section)

The ITB closed at $22.59 yesterday, down 0.75 percent on the session, but it came off its worst levels after the Federal Reserve indicated that it would not raise interest rates anytime soon. The exchange-traded fund came into July above $25 but fell sharply after poor housing data late last week and has yet to recover.

Yesterday's total option volume in the ITB was more than double its daily average for the last month. Overall calls outnumbered puts by a bullish 34-to-1 ratio.

Disclosure: I own ITB shares.

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