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Homebuilder Options Show Bulls Boost Bets Shares Will Rally 20% by January

Options traders betting U.S. builders and home-furnishings companies will overcome a record slump in housing sales are boosting bullish wagers to the highest level in eight months.

The ratio of outstanding calls to buy the SPDR S&P Homebuilders exchange-traded fund versus puts to sell has almost doubled in the past six weeks to 1.66. The biggest increase was in the ETF’s January $17.50 calls, which now have the largest total of all options on the fund, according to data compiled by Bloomberg. They pay off if the ETF gains 20 percent by January.

Rising purchases of bullish homebuilder options show investors are looking past a drop in new home sales to a record low in May and speculating on an industry rebound. A Standard & Poor’s index of 25 housing companies is projected to return to profitability this year and double earnings in 2011, according to the average analyst estimate in a Bloomberg survey.

“The sector is coming off the worst of it, and there’ve been some pleasant surprises lately with building data that weren’t as pessimistic as people thought,” said Andrew Wilkinson, the senior market analyst at Greenwich, Connecticut- based Interactive Brokers Group Inc. “Many investors are jumping on the bullish bandwagon and using call options to position for upside in the coming months.”

Purchases Increase

The ETF tracking 25 builders, construction materials producers and home-improvement stores slipped 0.9 percent to $14.89 as of 4 p.m. New York time today and is up 7.3 percent since an eight-month low on July 6. It’s risen during the past month following a report showing purchases of new U.S. homes rose in June more than forecast after a record low the prior month, signaling the worst of a slump triggered by the end of a government tax credit is over.

The last time the call-to-put ratio was this high, the ETF rallied 35 percent over the next five months to $19.64 in April, the highest level in a year and a half.

Pulte Group Inc., the largest U.S. homebuilder, surprised analysts by announcing yesterday that it had its first quarterly profit since 2006. The Bloomfield Hills, Michigan-based company reported second-quarter earnings of 20 cents a share, excluding some items. Analysts surveyed by Bloomberg projected a loss of about 2 cents on average.

‘Up From Here’

“We’re probably at the point where we can only go up from here,” Pulte Chief Executive Officer Richard Dugas said yesterday in a Bloomberg Television interview. “I would just caution investors and others watching, though, that it’s going to be a slow climb from here.”

Standard Pacific Corp. also beat analyst estimates in its report last week, more than doubling their predictions with its earnings of 4 cents a share, excluding some items. Companies tracked by the ETF that also exceeded estimates last month include Masco Corp., which sells cabinets, bathtubs and paints; A.O. Smith Corp., a producer of water heaters; and Leggett & Platt Inc., a maker of box springs for beds and shelves used in retail stores.

Options traders have been establishing more bullish positions over the past month. Open interest for calls on the ETF has jumped 58 percent from a month ago to 371,989 contracts, while the number of outstanding puts increased 7 percent to 224,720 during the same period.

August Calls

Buying of new bullish contracts helped lift the ETF’s call volume to a three-month high of 98,097 on Aug. 2. That session’s most-active contracts were August $16 calls, which accounted for almost half of call volume. Seventy-four percent of that day’s trades were on the ask price, which indicates that buyers initiated most transactions.

The January $17.50 calls have an open interest of 80,988 contracts, 14 percent of the ETF’s nearly 600,000 total and more than quadruple the contract’s 14,795 total six weeks ago. The calls closed at 59 cents yesterday. A buyer at that price needs the stock to rally more than 20 percent from yesterday’s close to more than $18.09, the strike price plus the cost of the option, before expiration on Jan. 21 in order to break even.

“There’ve been a lot more call buyers,” said Chris Bankovitch, head trader for institutional options at X-Change Financial Access LLC in San Francisco. “They could be thinking that there’s a rebound in housing on the horizon. People buying those January $17.50 calls are looking toward longer dated options to hope to catch a rebound in the housing market, and by virtue of that an uptick in homebuilding stocks.”

Lennar Puts

Trading of bearish Lennar Corp. options jumped to five times the four-week average yesterday as investors sold puts--a strategy that profits if the stock rises, allowing the seller to keep the premium paid. Almost all of the volume was concentrated in a sale of 11,000 September $14 puts, options strategists at Susquehanna International Group LLP in Bala Cynwyd, Pennsylvania, wrote in a report yesterday. Lennar shares slipped 1.2 percent to $14.45 yesterday.

“The options market has turned bullish on builders,” said Ophir Gottlieb, a trader and head of client services at Livevol Inc., a San Francisco-based provider of options market data and analytics. “People are selling puts and they’re buying calls, both of which are bullish.”

To contact the reporters on this story: Jeff Kearns in New York at jkearns3@bloomberg.net; John Gittelsohn in New York at johngitt@bloomberg.net.

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