More Plays on Housing Slowdown

The option-volume leader board is filling up with put options on index products, suggesting that this second consecutive day in which a weak consumer-related data point -- yesterday housing, today the consumer confidence level -- are starting to be taken as a more serious threat to an economic slowdown.

It is interesting to note that the most active strikes are in the slightly longer-dated options, for example the Spyder Trust (SPY - commentary - Cramer's Take) June $139 put is the volume leader with 25,000 contracts traded. In the iShares Russell 2000 Index ETF (IWM - commentary - Cramer's Take), it's the September $75 put with 19,000 contracts traded. This suggests the activity is buying as investors position for a growing weakness and declining prices. If it had been selling of puts to collect premium income, which I think has dominated index option activity over the prior year, traders would focus on near-term options to benefit from the accelerated time decay.

In a quick follow up to my first post regarding spillover from housing weakness, here are some other names that I've thought of and have been suggested by readers as more candidates for shorting regarding a slowdown in building: Furniture companies such as Ethan Allen (ETH - commentary - Cramer's Take) which delivered disappointing earnings this morning, and Lazy Boy (LZB - commentary - Cramer's Take)

One name that quickly comes to mind is Scotts (SMG - commentary - Cramer's Take), which was featured in today's Wall Street Journal saying it was preparing to take on more debt not to build the business, but to offer a special dividend and or stock buyback. The reason is they believe their business will continue to experience enough organic growth (pun intended) to generate enough profits to carrying the additional debt and make the interest payments. I appreciate their confidence, but what if rates go up, the value of houses goes down and suddenly people pare back on the amount money they spend landscaping and keeping their properties? Spring sales could prove disappointing. With the stock trading around $44 per share, the September $45 puts at $3.20 per contract looks attractive.

Makers of everything from cranes to HVAC systems Ingersoll-Rand (IR - commentary - Cramer's Take), which was downgraded this morning, gives a hint of looking beyond those impacted by the single family home or small residential sector. I know here in NYC and many other major urban areas, the biggest projects, and addition to inventory, comes from massive high rises, often multibuilding, multiuse concepts. With IR trading around $43.50, one can buy the June $40 puts for 60 cents. If you want to keep with my calendar spread concept, you can sell the April $40 put for around 20 cents and bring the net debit down to just 40 cents. That's a cheap way to get a 7% move down in the next three months.

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Steven Smith writes regularly for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He was a seatholding member of the Chicago Board of Trade (CBOT) and the Chicago Board Options Exchange (CBOE) from May 1989 to August 1995. During that six-year period, he traded multiple markets for his own personal account and acted as an executing broker for third-party accounts. He appreciates your feedback; click here to send him an email.

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