The DR Horton (NYSE:DHI) option pits, for all intents and purposes, were out of control yesterday. By the close, 93,000 puts had changed hands compared to 9,000 calls. Not only is that a put/call ratio of 11.6 (the third-highest in the equity market yesterday, according to WhatsTrading.com), but the overall activity of 102,000 contracts absolutely clobbers average daily option volume, which is closer to about 1,000.
So, what’s the deal? It looks as though put buyers were running the show and betting that DHI shares will drop over the next five weeks or so before April options expiration (on April 20).
The April 14 put saw more than 67,000 contracts trade, compared to existing open interest of just 511. It’s therefore safe to say that the volume consisted of opening trades. It also looks as though these puts were purchased (bought to open) between 58 cents and 79 cents per contract.
DHI shares were up more than 4% Thursday, closing at $14.56. Homebuilder stocks showed some strength in Wednesday’s session, rising in sympathy with Hovnanian (NYSE:HOV) after the builder reported strong earnings results.
Put buyers may be viewing this pop higher in DHI as a good entry point for their bearish positions. The 14-strike puts are out-of-the-money now (hence the relatively low premium price) but would not have been just last week when DHI was trading south of this strike price.
The most a put buyer can lose, if DHI is still trading above the 14 strike when the options expire, is 100% of the premium paid to acquire the puts. Potential gains, however, are unlimited down to the zero mark if the stock starts dropping.
Breakeven for a long put strategy is the strike price less the premium paid. So, for example, those traders who bought the puts for 79 cents have a breakeven of $13.21; those who scooped them up for 58 cents have a higher breakeven of $13.42. These levels are respectively 9.2% and 7.8% below the stock’s current price.
These traders aren’t relying on earnings to stir up some selling pressure in DHI shares because the next earnings report will be on or around April 30, 10 days after these options expire. So they expect other factors (or just a shift in momentum) to spur future losses in the shares.
Year-to-date, DHI has gained 15.5%, and it’s up 49% over the last six months. But from a long-term technical perspective, the shares are approaching some overhead resistance. Will it be powerful enough to cause a short-term reversal in the equity? Some very vocal option buyers sure think so.
As of this writing, Beth Gaston Moon does not own any shares mentioned here.