Breaking down a bear put spread on the real estate fund
U.S. real estate investment tracker iShares U.S. Real Estate ETF (IYR) is set for its highest close since early 2007, last seen up 0.3% at $89.55. IYR has been climbing the charts this year, so far up nearly 20%, and today rallied as high as $89.64 -- tying its 12-year peak touched on June 7. Aiding the exchange-traded fund's (ETF) rally has been the 80-day moving average, which has contained multiple pullbacks since April, and growing expectations for a Fed rate cut could have investors hoping that lower mortgage rates will boost the housing market. Nevertheless, it looks like one options trader is either betting on or hedging against a pullback for the fund.
In the options pits, traders have been busy today. Currently, more than 8,000 calls and 15,000 puts have changed hands -- about 1.5 times the expected intraday pace. There's notable activity at the weekly 6/28 84- and 87-strike puts, where a bear put spread looks to have been established.
The trader looks to have bought to open 4,000 87-strike puts for $0.47 each, and simultaneously sold to open an equal amount of 84-strike put for $0.12 each. This spread was established for a net debit of $0.35 per pair of options ($0.47 - $0.12), or $140,000 total (net debit x 100 shares per contract x 4,000 spreads).
Digging deeper, the spread will make money if IYR moves below $86.65 (bought put strike minus net debit) before the close on Friday, June 28, when the weekly options expire. However, while the sale of the lower-strike puts reduced the cost of the bought puts, they also limit the profit potential to $2.65 per spread (difference between strikes minus net debit), no matter how far IYR should sink below $84. Meanwhile, the investor will sacrifice the entire net debit if IYR settles above $87 when the options expire.