Options on ETFs are not news, but the increased volume and liquidity in these contracts is a relatively new phenomenon. Yet there are still a lot of traders who are not taking advantage of ETF options.

Today, I want to highlight an ETF you should think about shorting with puts, the SPDR S&P Homebuilders ETF (NYSE: XHB).

We are living in what PIMCO’s Mohamed El-Erian calls “the new normal” — a decade-long period that will see home sales at depressed levels and, thus, depressed revenues and profits for homebuilders. Forget the noise about a 5% rise in pending home sales in July. This number still includes sales driven by the homebuyer tax credit.

The real numbers to look at are:

• Inventory: 12.5 months and climbing, more than double the worst-case scenario three years ago, according the National Association of Realtors.

• New home sales: Sales of new homes hit an annual rate of 276,000, down from a peak of 1.6 million less than four years ago, according to the U.S. Department of Commerce.

• Credit standards: They are impossibly high. I have never missed a payment on anything, and I am having trouble securing a jumbo mortgage to refinance my home.

• Unemployment: The official number is near 10%, but real unemployment is closer to 20%. Unemployed people and people fearful of becoming unemployed do not buy homes.

• Twenty-five percent of homeowners with mortgages are underwater, according to Fannie Mae.

• My own analyses and crunching of public data tells me foreclosures will increase over the next 30 months and we will not see a bottom until 2013. These homes compete with new homes and drive down the price of new homes.

I could go on and on. I started recommending puts on the homebuilders in February 2007 — no applause please, it was someone else’s idea that I stole, and all it cost me was a nice lunch — and I still do not think they have hit rock bottom. Lousy sales will be with us for at least three years. And in the interim, perhaps some time in 2011, I think a big national homebuilder is going to bust. But rather than try to figure out which one, you can buy puts on XHB, the ETF for homebuilders and suppliers to the segment.

XHB has risen considerably with this mini-rally, and due to misleading headline news. I always look for doubles. Why take the risk if the reward is not there? So look at out-of-the-money puts at least six months out, which should give you some protection against a technical rally after Labor Day.

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