Shares of mortgage REIT Annaly Capital Management (NLY) have slid 27 percent in the past year, as interest rates have started to rise and the housing market has started to slow. One trader sees the possibility for a further drop.
That’s based on the September $5 puts. With 60 days until expiration, 21,750 contracts traded compared to a prior open interest of 378, for a 58-fold rise in volume on the trade. The buyer of the puts paid $0.10 to make the trade.
Shares recently traded around $6, so they would need to drop another $1 for the option to move in-the-money. The stock has a 52-week low just under $5.50, so a move in-the-money would represent a new low for the stock.
The company is coming off a strong year, with earnings up 15 percent, although revenue has been about flat in the past year. And the REIT has a massive 64 percent profit margin.
Action to take: Shares trade right near their book value, so they could offer a modest enough discount to be a buy in the $5 range. The stock currently offers a 14.2 percent dividend yield, which may drop in the coming quarters on a weakening stock market.
The September $5 puts are an interesting bet on a further short-term drop in the REIT. They’re also inexpensive enough that they could deliver high-double-digit returns before expiration. Traders should look for a quick profit.
Disclosure: The author of this article has no position in the company mentioned here, but may trade after the next 72 hours. The author receives no compensation from any of the companies mentioned in this article.