Call Selling in Homebuilder Stocks

CHICAGO (TheStreet) -- Shares of homebuilders Ryland Group(RYL Quote) and Lennar(LEN Quote) have dropped a bit more than the rest of the market Thursday, and call selling suggests investors are looking for limited upside in the near term.

The homebuilders sector is in the red thanks to disappointing housing starts and mortgage application metrics that were reported Wednesday. October housing starts missed expectations by 71 million, and mortgage applications for building permits dropped by 4% last month to the lowest annual rate since May.

The RYL Dec. 20 calls have traded more than 6,000 times today versus open interest of just 704 contracts. These calls have a delta of 47, and the stock closed down 40 cents, or 2%, to $19.61 a share.

This means for every dollar move in the underlying, the Dec. 20 calls should move by 47 cents. The options are trading down 25 cents, which is six cents more than the delta would suggest. We're thinking investors are selling these calls to open in expectation of limited upside throughout the next month.

We also saw heavy call volume in LEN with more than 10,200 Dec. 14 calls crossing the tape versus open interest of 1,100 contracts as investors traded these options to open. The Dec. 14 calls have dropped 38 cents on the day, and have a 54-delta, which means the calls are down by eight cents more than the delta would suggest. LEN shares closed down 45 cents, or 3%, to $14.17.