Slightly OT: Shorting Home Stocks

T

theBigD_IHB

New member
<p>Do the KB Homes and Hovnanian going to fall further? Looks like I missed the boat when these stock have fallen 10 points in 3 months. Damn it! Could have made some easy cash.</p>

<p><a href="http://finance.yahoo.com/q/cq?d=v1&s=hov%2ckbh">http://finance.yahoo.com/q/cq?d=v1&s=hov%2ckbh</a></p>
 
I think there is still opportunity in shorting or buying puts on the homebuilders. Without being specific I would look at the builders who are having a cash flow problem. I.E. they are not generating cash from the homebuilding sector. Also look into listening to their conference calls. The analysts have been asking when they purchased the land that they hold. If they have a significant portion of 2004 or greater then their profit margins will be smaller or they will have future impairments. I will warn you they are trading in a choppy manner. Days you would think they would down go they are up. That's why I like buying options so I don't have to worry about a margin call.
 
I have been trading in the homebuilders lately because they have been volatile. Over the last couple of weeks they rebounded off their lows to retouch their 50 period moving averages. There was a manic impatience about the buying that looked like short covering. Their stocks have been finding support at the 10 day and 20 day moving averages, and they have been meeting resistance at the 50 day day moving averages. If the short covering continues, they may break out above their 50 DMA. If they do, they will not find resistance again until their 200 DMA. I have entered some short positions at the 50 DMA only to be stopped out. Right now, these are a dangerous short play. Unfortunately, due to the volatility, the options are expensive right now. You will lose a lot in time premium.





I suspect these stocks will fall further, but with going short, timing is everything, and the volatility is making it very difficult to do.
 
IR - You are very right on with the option prices. I haven't bought any lately due to that very reason. I was tempted on one builder a few weeks ago and looking at the contract price today I am glad I didn't. May contracts on some seem reasonable but they really jump up in price in June and beyond. The May contracts are tempting if the jobs report is ugly it could pay off. I do not care if the ADP report has been changed to be more accurate it has only been one month since the change. I still do not trust it. I trade on many of the same principles as you with MAs and resistance levels but then there are times where I will just gamble with options. So far so good but I know I can't let it get to my head or it will lead to trouble.
 
It seems like everyone is thinking the very same thing: short homebuilders/real estate stocks. If many people short, doesn't that artificially pull the price up and cause the volatility that we're seeing? Seems like it's going to be very risky until the market sentiment on the home sector is stabilized.





Of course, I could totally be off base. I'm still learning about stocks so take the above with a grain of salt.
 
<p>I've been avoiding shorting the homebuilders as I thought of it as "too obvious" - everybody knows they're in trouble and to make money on the you have to spot the rallys from all the false bottoms.</p>

<p>I did buy some LEAP puts on some of the Alt-A lenders however, namely Countrywide and WaMu, though. I reason that the subprime debacle will not be contained and that eventually these alt-A lenders will suffer from all the liar loans they took on. </p>

<p>So far, no luck, there are still a lot of people who believe this downturn will be short and temporary and these too have been trying to rally. As IrvineRenter said, timing is everything, which is why I went ahead and got the longer options. Spreads are large though, so for that strategy to work the stocks will have to take a significant drop, not just a haircut.</p>
 
irvine grad: if everyone is shorting then at some point those people have to cover their positions. that can cause a temporary bump up in the share price.





on a more general note, if you go by efficient mkt theory, any public information about these companies should already be baked into the share price. people discussing shorting homebuilders on a popular housing blog -- i would probably qualify that as sufficient evidence that any negative sentiment is already in the share price. so if what you say is true -- "seems like everyone is shorting" -- sounds like you missed the boat.
 
irvine_grad,





It isn't the shorting that artificially pulls up the price, it is covering the short which requires buying. You are essentially correct in that it is the high short interest which is creating this volatility. When one person covers, another shorts the top of the rally, and the cycle starts all over again. It will take major institutional buying or selling to make a sustained move. Many of the institutions have already exited, and many others are taking a "wait and see" approach right now.





acpme,





I think the high level of short interest in the homebuilders caused their recent rally off the bottom. Like you said, if everyone is already short, if there aren't any big sellers to take the price lower, the shorts must cover, and a rally springs up out of nowhere. I suspect there are still many big institutions with shares they need to liquidate.





muzie,





Unfortunately, I think the "too obvious" problem has spilled over into put options on the Alt-A lenders. In an ordinary stock, the price of at-the-money puts and calls are approximately equal with a slight premium for calls. I checked the prices of puts for IndyMac (NDE) and the premium for puts was double the price of calls. I have never seen this phenomenon before. To make money with the premium that high, the stock price has to collapse. Anything other than a total collapse will be lost in time premium. Personally, I had thought about shorting these puts to make the time premium, but chose not to because the possibility of complete collapse is real -- just not real enough to give me confidence to go long on those puts. Good luck with your trade.
 
<p>IrvineRenter,</p>

<p>Yes you may be right that in that regard - it may be too obvious already. I, as you I'm sure, spend a fair amount of time spelunking on housing blogs and sites, so what is very obvious to us may not be so obvious to everyone however.</p>

<p>I do believe that we are witnessing an event that has never occured before in our history at the scale this is unfolding, which is why I'm definitely not ruling out the "total collapse" theory. I also picked very long term options (Jan09) to ensure I have plenty of time before the time premium starts kicking in at the higher rate. With an expiry date so far in the future I don't expect the premium to degrade the price too much, at least in the first year. The trade off is these long-term options are pretty illiquid, so the spread has cost me a lot already. For me that seemed like the best reward/risk tradeoff.</p>
 
I made good being long puts on NFI, LEND, and NEW. I thought Alt-A was next, but was more unsure of the timing, so I bought the 09 leap puts. It was too soon to go long even the leaps, and I ended up covering. Angelo Mozillo went on every media oulet he could and pumped his stock, but was selling 40,000 shares of CFC per day for more than a month. People bought into his talk and ignored his walk and CFC jumped up, along with NDE, WM, DSL and a few others. The Alt-As are counting their uncollected neg-am interest payments as "interest capitalization" earnings, so as long as they can keep from owning or foreclosing, they will be able to hide their losses. I haven't figured out how yet, but it seems to me that in order to time the purchase of the applicable puts, one will have to make a very good estimation on when the lenders will have to give up and start foreclosing in a big way. The premiums on the 09s are huge.
 
This is rich. While selling every bit of stock he can, Mozillo is now initiating his own leveraged buy out. CFC announced it is going to float convertible bonds to buy some stock back and for other capital expenses. There are a few other loser companies trying this right now, but ...



What kind of interest rate will these supposed bonds have to pay when CFC has a debt/equity ratio of over 500%?



Does this guy have no shame?



By the way, the premiums on CFC puts is low, but I can't figure out why.



This latest come-on may be just the sign I need to short this turkey.
 
awgee,





I haven't looked at CFC in a while. When it broke out above its 200-day MA, I couldn't believe it, so I just stopped watching. I thought the rally was just short covering, but it has moved pretty high for that. That is probably why the puts are cheaper. I may look at it tomorrow, it has to top sometime...





BTW, I shorted LEN at the close today. 5-16-2007





Update - I was stopped out early when LEN broke above its 50-day MA.
 
CFC was rumored to be a buyout target by the chair thrower. The correction they saw recently could also be described as technical. But the buyout sonds more logical. There was one day where the puts were priced right and the next day you would have had to sell. I stay away from CFC. Only 7.5% of the float is short.
 
<p>One I have been watching is NFI because their numbers are awful and running out of cash very quickly. Puts just aren't priced right at all and I think people are hoping for the next NEW. I am wondering if they are buyout material for a hedgefund because they could hold the loans for a longer time and sell them when the MBS market improves. The loans aren't that bad and they could repackage the performing loans and sell them at a profit. My thinking was if pricing on the puts improve go with a strangle.</p>

<p>Any thoughts ideas, opinions or reconfirmation that I am crazy. </p>
 
graphix,





Given the high premiums on the puts, I have been trying to think of a good way to make something off it. I would think the <a href="http://www.investopedia.com/terms/s/strangle.asp">strangle </a>would make the time decay problem even worse because now you have to have a move so large as to pay for both.





I have been considering a vertical spread where you short the at-the-money puts and buy some out-of-the-money puts. However, the out-of-the-money puts are so expensive as to make this strategy not very profitable.





My other thought is to short the puts and short the stock in equal measure. If the price collapses, you will make as much on the short trade as you would lose on the puts. If the stock goes nowhere, you make the time premium. Of course, if the stock rises dramatically, you are going to lose the difference between the premium and the gain in price. Maybe if that strategy is coupled with an out-of-the-money call to save you to the upside... but the cost of the call cuts into your profit...





You got me on how to play it. I like the last strategy, but I probably won't bother.
 
<p>The low price of NFI is such that normal bear call spreads and bear put spreads do not seem profitable. There is not enough downside potential because of the low price also, and although the upside risk is negligible from a sector outlook, there is major upside price potential. All in all, I do not see much opportunity here. The majority of the short money has been made.</p>

<p>Try looking at CVTX as a short squeeze.</p>
 
I just checked CVTX (7:03 AM), and it just touched its 200 MA on a bull run. That is a major short signal to me. I tried to get in at $11.40, but i didn't get filled. The stock is on my broker's hard-to-borrow list. It will be interesting to see what happens...
 
<p>Sorry, I should have been more explicit. I think the short interest in this stock is huge and the shorts are now getting squoze, (is that a word?), and will continue to get squeezed. My father and I got in at $8.24. </p>

<p>The only thing I like more than making good on a short is getting in early on a short squeeze and watching the price go ballistic.</p>
 
awgee,





I knew what you were saying. I think the short squeeze may run out of gas at the 200-day MA. If there are any more sellers out there, they should enter the market now. Let's see how the $11.40 price holds up. If I am correct, it will be a short term top (at least 3-5 days). If I am wrong, I will be happy my broker didn't have any of the stock for me to borrow and sell short.
 
Can you short Pimco? They hired Greespan. I am flabergasted. What are they thinking? Is he going to be their contrarian indicator?
 
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