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Why bears are circling REIT sector

David Russell (david.russell@optionmonster.com)

Traders think the situation is going from bad to worse for real-estate investment trusts.

The sector has badly lagged the broader market for the last six months as an improving global economy pushes up interest rates and reduces the appeal of their rich dividends. They lagged again on Friday in the wake of a blowout jobs report, and the option paper turned bearish as well.

optionMONSTER's Depth Charge monitoring program first detected unusual activity in Host Hotels & Resorts, with more than 3,200 January 2015 17 puts bought against open interest of just 3 contracts. Most of them priced for $1.75 and $1.80.

Less than an hour later, bearish activity hit Digital Realty Trust as about 5,800 April 40 puts changed hands, mostly bought for $2.50. Volume also exceeded open interest, indicating that new positions were initiated.

Puts lock in the price where a stock can be sold, so they appreciate when prices drop. Investors use them to hedge long positions or to speculate on a pullback. (See our Education section)

HST pared early losses to end the session up 0.65 percent to $18.60, but DLR remained weak all day and closed down 1.76 percent to $45.81.

The broader REIT sector--measured by the iShares Dow Jones U.S. Real Estate Fund--mostly tracked the S&P 500 following the 2008 financial crisis, but the two diverged sharply starting in May. The IYR also made a lower high versus its peak in 2007, while the broader market has proceeded into new record territory.

Overall option volume was triple the daily average in DLR, with puts outnumbering calls by 8 to 1. HST's turnover was 5 times normal levels, with puts accounting for a bearish 85 percent of the total.

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