Looking For Further Downside in Ryland Group, Lennar

Shares of homebuilder names Ryland Group Inc. (RYL) and Lennar Corp. (LEN) have dropped a bit more than the rest of the market today, and call selling suggests investors are looking for limited upside in the near-term.

The homebuilders sector is in the red today thanks to disappointing housing starts and mortgage application metrics announced yesterday. October housing starts missed expectations by 71 million, and mortgage applications for building permits dropped by 4% last month to the lowest annual rate since May.

The RYL December 20 calls have traded more than 6,000 times today versus open interest of just 704 contracts. These calls have a delta of 47, and the stock closed down 40 cents, or 2%, to $19.61 a share. This means for every dollar move in the underlying, the December 20 calls should move by 47 cents. The options are trading down 25 cents, which is six cents more than the delta would suggest. We’re thinking investors are selling these calls to open in expectation of limited upside throughout the next month.

We also saw heavy call volume in LEN with more than 10,200 December 14 calls crossing the tape versus open interest of 1,100 contracts as investors traded these options to open. The December 14 calls have dropped 38 cents on the day, and have a 54-delta, which means the calls are down by eight cents more than the delta would suggest. LEN shares closed down 45 cents, or 3%, to $14.17.

The majority of options volume in LEN accumulated in the December 14 calls (not including front-month options that are set to expire tomorrow), and the December 20 calls are home to almost all of the volume across all strikes in RYL.

Call-selling activity such as this does not mean investors should run out and sell their RYL, or LEN shares. However, it is noteworthy that in the past few months, when the market declines, bottom-fishers typically surface and buy calls to bet on near-term upside. But in the homebuilding sector, call sellers could be calling for a further drop in shares, or at least very limited upside.