The SPDR S&P Homebuilders ETF (NYSEArca: XHB) is up 14.3% year-to-date and the popular homebuilders exchange traded fund jumped more than 2% ahead of this week’s Federal Reserve meeting, but some traders took bearish options positions in XHB ahead of the Fed meeting.
On Tuesday, options in XHB were “crossing at 22 times the average intraday pace, with roughly 15,000 contracts exchanged. That’s about 10 times the number of XHB calls traded so far, though call volume on the homebuilders exchange-traded fund (ETF) is running at four times the norm. Further, put volume is pacing to hit the 97th percentile of its annual range,” reports Schaeffer’s Investment Research.
XHB’s well-known rival is the iShares U.S. Home Construction ETF (NYSEArca: ITB). The equal-weight XHB mixes stocks such as Tempur Sealy (NYSE: TPX), Williams-Sonoma (NYSE: WSM) and Restoration Hardware (NYSE: RH) with pure play homebuilders such as Lennar (NYSE: LEN) and Toll Brothers (NYSE: TOLL) among others.
ITB tracks the Dow Jones U.S. Select Home Construction Index while XHB follows the S&P Homebuilders Select Industry Index.
In a higher rate environment, home affordability is diminished and there is less incentive for renters to purchase a new home. Additionally, the more expensive mortgage rates may scare away current homeowners who are thinking about upgrading to a bigger, more expensive home.
Conversely, housing industry experts also argue that higher rates reflect an improving economy and wage growth, which could also help the housing market in the long run. Still, some market observers are worried that the rising mortgage rates could dissuade borrowers to move into new homes.
Traders looking for a bearish play on homebuilders stocks can consider the Direxion Daily Homebuilders & Supplies 3x Bear Shares (NYSEArca: CLAW), which attempts to deliver triple the daily performance of the index XHB tracks.
“Aside from a potential post-Fed slip, the speculator could also be betting on familiar resistance for XHB. Shares of the homebuilder ETF are within a chip-shot of their August 2015 all-time high of $39.22, and the $37-$39 neighborhood has been a speed bump for XHB for more than two years. Further, the overhead $40-$41 area represents a 50% premium to XHB’s 2016 lows near $27,” according to Schaeffer’s.
For more information on the housing sector, visit our homebuilders category.