Opportunity seen in REIT bloodletting
David Russell | [email protected]
The activity mostly focuses on companies that are structured as real-estate investment trusts but own mortgages rather than physical property. They tend to leverage their assets and pay big dividends, which makes them sensitive to interest rates.
Rising Treasury yields and talk of less quantitative easing by the Federal Reserve have triggered selling in the industry, and names including CYS Investments and Armour Residential are down more than 4 percent today.
But now optionMONSTER's Heat Seeker trade scanner shows the sentiment turning bullish. The first big blocks crossed in ARR, with buyers snapping up the July 5 calls for $0.25 to $0.29 and the October 5 calls for $0.36. Each strike saw more than 5,000 changed hands in volume that was above the previous open interest, indicating that new money was put to work.
Minutes later, the Heat Seeker detected the purchase of 4,500 July 10 calls in CYS for $0.65 and the sale of an equal number of July 12s for $0.05. There was barely any open interest before that transaction occurred.
Calls lock in the price where shares can be bought, which gives them potentially significant leverage to a rally. In the case of CYS, traders are using a vertical spread that will pay $2 if the stock climbs and $12. They paid $0.60, implying a potential profit of 233 percent if that move occurs. (See our Education section)
ARR is down 4.36 percent to $5.05 in afternoon trading after hitting an all-time low of $4.82 earlier in the session. CYS is off 2.59 percent to $10.51.
Our scanners also picked up heavy activity in the iShares Dow Jones Real Estate exchange-traded fund, which offers broad exposure to the REIT sector. It's been falling sharply as well, and came into the session down 5 percent in the preceding week.
Today, however, traders sold more than 20,000 September 68 puts for $2.17, betting that the IYR will remain above the strike price. The June 71 puts and June 70s were also sold against open interest.
IYR is down 2.43 percent to $69.90. Total option volume in the fund is quadruple the daily average.