Investors grab calls on U.S. home builders` stocks
August 16, 2006 18:16:17 (ET)
By Doris Frankel and Ilaina Jonas
CHICAGO/NEW YORK , Aug 16 (Reuters) - Demand for bullish calls pegged to the shares of home builders such as Pulte Homes Inc. (PHM,Trade), D.R. Horton Inc. (DHI,Trade) and Toll Brothers Inc. (TOL,Trade) heated up on Wednesday on the belief that the worst might be over for the hammered sector, analysts said.
Stocks rallied for the second day on Wednesday after the government gave another mild reading on inflation in July. That increased expectations that the Federal Reserve will not raise interest rates next month and drove demand for rate-sensitive stocks like home builders.
Throughout the day, investors acted like they couldn't get enough September calls in those three stocks. For example, volume totaled more than 11,300 Pulte calls with a $30 strike price, while 17,600 Horton calls with a $22.50 strike price changed hands, and roughly 13,500 Toll Brothers calls with a $27.50 strike price were traded in the U.S. options market.
These calls were all out of the money, which means that these strike prices were above where the individual stocks closed on Wednesday. Pulte shares climbed 5.01 percent, or $1.42, to close at $29.75, while Horton shares rose 5.46 percent, or $1.13, to end at $21.83, and Toll shares gained 3.91 percent, or 96 cents, to end at $25.49 on the New York Stock Exchange.
Speculators bid up those calls, betting on further gains and driving their contract prices higher throughout the day.
"Most of the options trading came from institutions who bought these out-of-the-money calls in large blocks on expectations that today's rally in the home builders will extend into September," said Jon Najarian, co-founder of insideoptions.com, a Web information site
WHEN CHEAP LOOKS NICE
Tim Biggam, options strategist at Man Securities, an options brokerage firm in Chicago, said the home-building stocks have been so beaten down by higher interest rates and slower growth in the U.S. economy that valuations of these stocks are now at an extremely attractive level.
The low valuations as well as this week's data on mild producer and consumer prices in July -- suggesting the Fed may extend its pause in its two-year campaign of raising rates -- spurred a two-day rally in home builders' shares this week, options analysts said. A week ago, the Fed decided to pause, after raising rates 17 times since June 30, 2004.
The Dow Jones U.S. Home Construction Index ((.DJUSHB)), a yardstick that measures home builders' stock performance, ended up 4.54 percent at 619.15. Still, since hitting a high in July 2005, the index has lost 44.5 percent of its value, indicating investors have wiped out much of the gains in these stock prices over the past few years.
The enthusiasm among the options buyers is due chiefly to expectations that long-term interest rates are low and might not go higher, said Todd Vencil, an analyst at BB&T Capital Markets. He noted that option investors and buy siders are beginning to believe that the U.S. home-buying market is nearing the bottom.
Indeed, the yield on the 10-year U.S. Treasury note ((US10YT=RR)), used as a benchmark for mortgage rates, has fallen 13 basis points to 4.87 percent since the beginning of the week.
"That allows home buyers to spend more, given the same income level," Biggam said.
But BB&T Capital's Vencil said he doesn't believe the bottom is yet in sight because inventories of homes on the market are swelling and cancellations of orders for new homes are rising.
On Tuesday, the National Association of Home Builders said its NAHB/Wells Fargo index of builder confidence fell to 32 in August from 39 for July -- its lowest level since 1991.
Inventories of unsold existing homes surged 39 percent in the year through June, according to the National Association of Realtors.
Still, that did not stop the bullish sentiment among option traders.
"At this moment, people believe there will be no need for an interest-rate increase and therefore, the home builders' shares are up and there is a lot of call buying in that sector across the board," said William Lefkowitz, options strategist at vFinance Investments, a New York brokerage firm. |
