Options: Bear Invasion at Meritage Homes

By Jud Pyle, CFA, chief investment strategist for the Options News Network

Right out of the gate this morning, at least one investor expressed bearishness and bought put options in Meritage Homes(MTH Quote) a few weeks before the homebuilding company is scheduled to release its second-quarter earnings figures.

The investor bought more than 20,000 Aug. 17.5 puts for approximately $2.85 per contract with the stock trading at $15.98 a share. These in-the-money puts are currently trading up 75 cents and are home to current open interest of 440 contracts.

The investor needs Meritage shares to expire lower than $14.65 (the strike price minus the premium paid) come August expiration to make money on this trade. The value of these puts is rising more than their delta would imply, suggesting that implied volatility is moving higher as earnings approach.

Normal daily options volume across all strikes in Meritage is approximately 2,500 contracts compared to the 23,000 options that have changed hands during the first two hours of trading today -- the majority of that volume accumulated in the Aug. 17.5 puts.

Meritage did not announce any significant news to catalyze the heavy put-buying we saw this morning, but the stock is about 37% off its recent high of $23.38 reached on May 4. The stock is currently trading down $1 on the day.

Even though Meritage shares have rallied more than 85% since their closing low of $8.64 on Nov. 21, at least one investor could be expecting a pullback going into earnings season. Analysts expect the company to report a 12-cent drop in earnings, or a 72-cent loss, which means we might see the stock fall even more before the week of July 27.

Investors should not interpret heavy put buying as a reason to automatically sell Meritage shares. Bearish options activity could be a chance for long investors to take some profits with a few weeks to go before the company's second-quarter earnings report.

For more heavy put-buying activity, check out today's Sidewinder at Options News Network.

Meet Jud Pyle live in Las Vegas at the Forex & Options Expo.

Jud Pyle is the chief investment strategist for Options News Network (www.ONN.tv) and the portfolio manager of TheStreet.com Options Alerts. Click here for a free trial for Options Alerts. Mr. Pyle writes regularly about options investing for TheStreet.com.