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What's behind puts in homebuilders

Mike Yamamoto (mike.yamamoto@optionmonster.com)

Investors were buying puts in several key homebuilding names yesterday as the sector trades at multi-year highs.

A block of 9,700 April 19 puts was bought in PulteGroup for $1.45, according to optionMONSTER's Depth Charge tracking system. Open interest in the strike was just 442 contracts before trading began, clearly showing that this is a new position.

Later in the day D.R. Horton drew a purchase of 8,719 May 20 puts in a single print for $1.25 in volume that dwarfed previous open interest of 163 contracts. KB Homes also faced put buying as more than 1,600 April 11 contracts traded for $0.13, also well above open interest.

Finally, a large put trade appeared in the SPDR S&P Homebuilders Fund. Our systems detected the sale of 21,000 March 24 puts for $0.16 and the purchase of the same number of March 26 puts for $0.49. The trader could have been rolling an initial position to a higher strike or opening a new vertical spread , but either way the action would be positioning for a potential drop.

PHM fell 1.24 percent to $19.10 while DHI slipped 0.29 percent to $20.89, but both are still trading near their highest prices since June 2007. KBH was down 1.53 percent to $16.11, not far from its best levels since May 2010.

The XHB exchange-traded fund, which lists PulteGroup and D.R. Horton among its top holdings , declined 0.43 percent to $27.65 yesterday. Last Thursday the ETF hit $28.03, its highest intraday price since July 2007.

Given how far these stocks have run, yesterday's puts could well have been bought to protect gains rather than make any straight bearish bets. Put buying locks in the price where traders can sell shares, regardless of how far they might fall. (See our Education section)

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