PulteGroup (NYSE:PHM) nabbed a brokerage upgrade on Monday, and the move may have only encouraged bearish option traders to bulk up their positions. Barclays lifted its rating on the security to “overweight” from “equal weight,” helping the stock rise about a half-percent on the day.
Although PHM shares have gained over 40% year-to-date, some option players remain firmly in the bearish camp. In fact, they’re making rather large bets that PHM will trade below $8 by April options expiration in 38 calendar days.
There are currently 51,600 put contracts open at this out-of-the-money strike, easily making this the most active strike in the April series (the next-highest open interest level is the 9-strike call, with about 6,400 open contracts). What’s most interesting about the 8-strike put is that much of this volume transpired in two days’ worth of trading.
On Feb. 28, roughly 27,000 puts traded at this strike, with nearly all of the positions going off at the ask price (indicating buyers). Almost 25,000 of these translated as new open interest the next morning.
It looks as though bears were at it again yesterday, trading nearly 25,000 options at this strike. Open interest expanded as aforementioned to more than 50,000 this morning, so yesterday’s volume also consisted of opening positions. The put closed at 20 cents per contract, so for the sake of providing an example, let’s assume put buyers acquired the positions at that price.
If PHM is trading above $8 when the options expire, put buyers will lose 100% of the premium paid. For these traders to profit, PHM would need to be trading below $7.80, or the strike price minus the premium paid. At this point, potential gains become unlimited down until the zero mark.
The delta on this put is currently 21%, meaning there’s only a 21% chance — given all current factors — of this position being in the money by expiration. It also means the put will gain 21 cents in value for every $1 the stock declines. Since PHM is a low-priced stock, however, a $1 move is significant (about 11%). All this put buying is a pretty aggressive bet that the shares will topple this much in just over a month.
This isn’t the only sign of bearishness, either. Short interest increased slightly during the past month, with shorted shares now representing 12.8% of the stock’s float.
This pessimistic speculation is occurring even as there are tentative signs of improvement in the housing sector. It appears some investors aren’t ready to move out of bearish territory just yet.
As of this writing, Beth Gaston Moon does not own any shares mentioned here.