Big Money’s Flipping Houses

Hey Trader,

Since the start of the pandemic, home prices have been soaring, as demand has outstripped supply, and the cost of new home builds has risen on supply chain issues and soaring material costs.

House flippers have been having a field day, taking advantage of the imbalance of supply and demand …

But right now, it looks like one of the biggest flippers of them all may be feeling the pinch …

Ahead of its (disappointing) earnings last night, this real estate mogul took a dive on the charts …

And sector headwinds left another tumbling in sympathy.

Do these Big Money moves give us any insight about what the future looks like for these two real estate stocks?

Flipping Out

Ahead of its earnings report on Tuesday night, online real estate marketplace (and house buyer) Zillow Group (Ticker: Z) was already getting hit hard on the charts, with the shares tumbling 10.2%.

The shares now sit at $87.20, down a whopping 58% from their all-time high of $208.11 Z traded at earlier this year.

Chart courtesy StockCharts

If the housing market is so robust … What’s causing Z to go bust?

During its earnings call last night, Z reported a loss of $550 million on homes it has purchased over the last several months.

The real estate giant admitted it had overpaid for the properties, and was now selling a majority of them at a loss.

Even worse, the company is closing down its iBuying business — aka Zillow Offers — and laying off 25% of its workforce.

Ouch.

Ahead of this earnings call, as Z was selling off during Tuesday’s trading session, Big Money was quick to make a move.

This risk reversal in particular caught my eye:

This trader purchased 3,750 contracts of the January 2022 105-strike calls for $3.25, while simultaneously selling 3,750 contracts of the January 2022 75-strike puts for $4.30.

The $4.30 received from selling the put more than covered the cost of the calls, and left this trader with an additional $393,750 of premium.

This risk reversal reverses the volatility skew (read more about skew right here and right here).

Essentially, since out-of-the-money (OTM) puts are used for hedging, and therefore are usually more in demand by options traders, they have higher volatility priced in, making them more expensive relative to calls.

By selling the higher implied volatility (IV) option (the put) and buying the lower IV option (the call) the trader is able to reverse the typical skew risk.

This trade essentially behaves the same as a long position in the underlying.

That means this trade could be one of two things: a protective hedge on a short position …

However, I did not see a matching trade on the underlying cross the tape today …

So, what I think is the case here is a bullish position where the trader is counting on the puts staying out of the money, and wants the calls to finish in the money.

Since this trade was done for a credit, it’s not quite as strong of a bullish message as if the trade had been done for a debit. As long as Z stays above the 75-strike of the put sold, this trader can keep that $393,750 premium received …

But to me, it looks like Big Money thinks Z’s troubles are only short-lived.

Open House

Residential real estate stock Opendoor Technologies (Ticker: OPEN) also had a rough day on the market during Tuesday’s trading session …

Through no apparent fault of its own.

It seems as though Z’s headwinds are blowing against the real estate sector, and OPEN shares fell a whopping 14.7% to close at $21.12.

Chart courtesy StockCharts

OPEN also hit an all-time high earlier this year, although the shares have only been trading since June 2020.

It seems like Big Money doesn’t expect OPEN’s dip to stick either …

Not only are they expecting the shares to make a full recovery from today’s losses, but they’re even expecting to potentially see some additional upside.

And they’re giving it all the way until … next week to play out.

This trader opened a bull call spread by buying up 6,000 contracts of the November 12 22-strike calls for $1.35.

They then sold 6,000 contracts of the November 12 28-strike calls for $0.15, giving them a total cost of just $1.20 to open this spread (a total of $720,000 outlay).

As long as OPEN can recover above the $23.20 breakeven cost of the calls purchased, while remaining below the breakeven of the calls sold, this trader stands to make quite a bit.

However, that would require more than a 32% move higher within the next eight trading days, so it’s a bit of a tall order, even if OPEN’s drop today wasn’t necessarily due to its own misdoings.

It seems like Big Money is bullish on real estate … does that mean it’s time to buy?

My Big Money Flow members know my thoughts on that … if you want my Big Money insight, you’ll have to join us.

Your Only Option,

Mark Sebastian

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