The Housing Sector is on the Rise, so Why are Bears Making Bets Against Masco (MAS)?
New home sales saw the best one-month increase since 1963. Sales rose to a seasonally adjusted annual rate of 411,000 in March. This represents a 26 9% increase above the revised February rate of 324,000 and 23.8% more than last year’s March estimate of 332,000 according to a report released today by the U.S. Census Bureau and the Department of Housing and Urban Development.
This recent data also shows a marked improvement in the new housing sector and in the excising home market on Thursday with a 16.1% jump in sales versus the same period last year.
Housing and housing related stocks have gotten a boost over the past couple weeks. The SPDR’s S&P Homebuilders Index ETF (NYSE: XHB), jumped 22% in the past couple weeks from a low of $16.35 to almost $20.00.
What This Data Means for Masco (NYSE: MAS)
One company in particular that has experienced a sizable jump in this period is Masco (NYSE: MAS).
The consensus estimate among the fourteen different analysts covering MAS earnings scheduled to be announced Monday, April 26, is for a flat earnings report with high and low estimates at $0.09 and $-0.16, respectively.
Masco, what some might call a second derivative to the housing market, is probably not a household name although their brands and products are probably all around your home.
When the housing market is strong, a company like MAS stands to benefit since they produce faucets, cabinets, windows, paint, etc. Their product lines include BEHR paint, Delta and Hansgrowe faucets, hardware and even KraftMaid Cabinetry, which is the world’s largest build-to-order cabinet manufacturer.
Bearish Options Activity in Masco (MAS)
Today’s activity is notable because these bearish trades in MAS go against the grain of what appears to be a bullish climate for this particular stock, and MAS doesn’t typically see heavy options volume. One reason for this is due to its relative low cost compared to other options-eligible securities.
30,000 of the MAS July17 puts were purchased to open today as well as 7,000 July 20 calls were sold to open. Daily volume tends to average below five million shares per day.
The put trade alone would give the purchaser the right, but not the obligation, to sell three million shares. The purchaser of the puts is limited in profit to the strike price minus the premium paid.
The call trade obligates the seller to deliver 700,000 shares of stock at $20, if assigned. Remember, short calls have limited profit (the premium received) and theoretically unlimited risk above the strike.
This activity reinforces the idea that different market participants have different goals and outlooks on expected stock movement. Even when there appears to be only buyers or sellers, many times there is someone else on the other side of that trade who has a differing opinion.
In both of these trades, the investor could have an existing stock position in MAS ahead of the trade, which would change the risk characteristics of both option trades.
Questions?
Does this explanation make sense? If you have lingering questions, please let me know in the comments and I’ll do my best to answer.
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Photo credit: Lauren Keith
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