Bearish REIT Option Bets Rise to 17-Month High as Economy Slows
Option traders are pushing bearish bets against U.S. real estate investment trusts such as Simon Property Group Inc. (SPG) to the highest level since January 2010 as the world’s largest economy slows and unemployment rises.
The ratio of puts to sell the iShares Dow Jones U.S. Real Estate Index exchange-traded fund has more than doubled in the past three months to 2.53 as investors bought more contracts to protect against declines or speculate on a retreat. The ETF (IYR) tracking 82 companies rose 0.9 percent to $60.60 yesterday and has advanced 8.3 percent this year, more than twice the gain for the Standard & Poor’s 500 Index.
“There’s been a lot of protective flow in there for the last few weeks,” said Stephen Solaka, who oversees about $50 million including options as co-founder of Belmont Capital Group in Los Angeles. “There could still be some pressure in the REITs if the economy has a double dip.”
REITs have surged in the past two years as the credit markets opened for publicly traded property owners ahead of gains in occupancies, rents and real estate prices. Investors may be betting that gains in the shares aren’t justified by the slow recovery in the market.
The U.S. economy expanded at a 1.8 percent annual rate in the first quarter, slowing from 3.1 percent growth in the fourth quarter and 2.6 percent in the third, according to the Commerce Department. Unemployment rose to 9.1 percent in May, increasing for a second month after a two-year low of 8.8 percent in March.
Commercial Property Prices
The Moody’s/REAL Commercial Property Price Index dropped 3.7 percent in April from March and is 49 percent below the peak of October 2007, Moody’s said in a statement today.
Simon, the biggest U.S. mall owner, accounts for 8.2 percent of the Real Estate Index that the ETF tracks and is the largest member by weight. The next-largest are Equity Residential (EQR) and Vornado Realty Trust (VNO), the third- and fourth-biggest U.S. REITs by market value, respectively. The index also includes some real estate companies that aren’t classified as REITs, such as Florida landowner St. Joe Co. and commercial-property broker CB Richard Ellis Group Inc.
The ETF’s put volume surged to 84,435 contracts yesterday, the most since October 2009 and triple the four-week average. July $58 puts were the most-active contracts. A block of 24,719 of those contracts purchased June 9 almost tripled the open interest for that option to 53,518, according to data compiled by Bloomberg and Trade Alert LLC.
“Put activity has dominated the tape,” equity derivatives strategists at Bank of Montreal said in a report. One investor yesterday sold 14,500 July 58 puts to buy July $54 puts, while others concentrated purchases in the July $58 and $59 puts, they said.
The strategists recommended buying the ETF’s July $60 puts while selling July $55 puts, a strategy known as a spread that cuts the cost of the trade while capping potential profit. They cited the rising put-call ratio and other “warning signs giving us cause for concern,” according to the report yesterday.
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