Easily one of the most discussed and controversial topics, fears of a possible housing correction – or even a crash – has kept the pressure on against residential real estate companies, particularly Compass (COMP). Since the start of the year, COMP stock “only” lost a little more than 8%, which initially doesn’t seem that horrific. Extend it out to the trailing one-year period and we’re still only talking about a 19% loss.
However, since making its public market debut, COMP stock is down approximately 90%, based on weekly average pricing data from Google Finance. Moreover, circumstances have gotten incredibly ugly recently. Over the past 30 (calendar) days, shares slipped 33% as investors rush out of the housing ecosystem. With both inflation and interest rates remaining stubbornly high, fewer families have the financial means to quality for a mortgage.
Indeed, the Associated Press earlier this month pointed out that home loan borrowing costs continued to march higher, leading to a then-average rate of 7.57%. At time of writing, the 30-year mortgage stands at just over 8%. Unless some deflationary catalyst enters the picture, we could soon be looking at double-digit rates, a figure that would have been ridiculous to think about just a few short years ago.
Unfortunately, the current circumstance puts the housing arena at a standstill. Homeowners don’t necessarily want to sell because they’d have to buy another home at wildly outrageous borrowing costs. Obviously, on the other end, would-be homebuyers have been simply forced out of the market.
Therefore, it’s not a surprise that COMP stock saw aberrant price action in the derivatives market. How then should retail investors respond?
COMP Stock Attracts Institutional Investors
Following the close of the Oct. 27 session, COMP stock represented one of the highlights in Barchart’s screener for unusual stock options volume. Notably, total volume reached 3,394 contracts against an open interest reading of 42,659 contracts. Against the trailing one-month average metric, Friday’s volume represented a lift of 845.4%.
However, it’s the transactional breakdown that caused at least a few investors some pause. Specifically, call volume came out to 1,085 contracts, which got beat out by put volume clocking in at 2,309 contracts. This pairing yielded a put/call volume ratio of 2.13, which on paper implies a bearish framework.
At the core, put options give contract holders the right but not the obligation to sell the underlying security (or asset) at the listed strike price. In other words, if COMP stock were to tumble badly, put holders would be able to sell their holdings at the higher strike price (assuming that is the case). By buying puts, traders basically may be taking a bearish bet on the underlying stock.
However, one must be careful in assuming a face-value interpretation of the put/call ratio. For example, if a select few institutional investors sold (or wrote) puts, they would be betting – all other things being equal – that the target security will not fall materially below the strike price, enabling the profitable collection of the option premium.
To better understand the nature of the higher activity toward put options, it’s best to refer to Fintel’s screener for options flow, which specifically targets big block trades likely made by institutions. Sure enough, a major trader (or traders) sold 1,000 contracts of the May 17 ’24 2.50 Put, collecting a premium of $70,000 in the process.
In addition, another trader (or perhaps the same one – we just don’t know) bought 1,000 contracts of the May 17 ’24 4.00 Call, paying a premium of $18,981. On the surface, the activity appears bullish, suggesting that the smart money holds a contrarian view of COMP stock. Nevertheless, it’s best to approach Compass with a careful (if not skeptical) framework.
The Strike Price Spectrum Appears Muted
One clue that circumstances might not be particularly favorable for COMP stock is the broader strike price spectrum. Since last year, traders appear to be taking fewer bullish bets that feature far out-the-money (OTM) calls. In other words, when traders are optimistic about Compass, they keep their profitability expectations realistic.
For instance, Fintel’s screener shows that for big block calls expiring in July last year, the strike price peaked at $7.50. For big block calls expiring this year, the highest strike price was only $5. So far, for options expiring in 2024, calls expiring in January happen to have a strike price of $7.50.
However, in this case – the Jan 19 ’24 7.50 Call – a good chunk of this volume stemmed from institutional selling, not buying. That implies a bearish framework as the major traders are anticipating that COMP stock will not reach the $7.50 strike price.
Second, investors should be aware that since the end of September 2021, hedge funds have largely been exiting COMP stock. Subsequently, this selling activity generally coincides with volatility for the shares. Given how hedge fund sentiment remains negative, I would be cautious about making heavy wagers on Compass.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
