Shares of residential construction company PulteGroup (PHM) are down 7 percent over the past year, about half as much as the S&P 500. One trader sees a further drop ahead for shares.
That’s based on the April $50 puts. With 91 days until expiration, 8,437 contracts traded compared to a prior open interest of 182, for a 46-fold rise in volume on the trade. The buyer of the puts paid $2.78 to make the downside bet.
Shares recently traded for about $51, so the stock would need to drop about 2 percent for the option to move in-the-money. PulteGroup shares have significantly rallied off their 52-week low of $35 set back in June.
Homebuilding data suggests that the slowdown that started last year will continue in earnest this year. Higher construction costs will likely squeeze profitability on new homes sold, and higher interest rates will reduce the potential supply of buyers.
Action to take: Investors interested in homebuilders should look for a chance to buy shares at a lower price, possibly in the low $40 range. That would be a fair price for the current housing market, and would allow investors to obtain a dividend yield higher than the current rate of 1.3 percent.
For traders, the put options are reasonably priced, especially if there’s a sharp downturn in shares in the coming months. Traders can likely see mid-to-high double-digit gains on the puts in such a scenario.
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.