If You Like Real Estate, This Could Be The Time To Buy
Summary
- Economic analysis helps the investor find values and determine what to buy. Investor sentiment can help decide "when" to buy it.
- Current puts and calls ratios are indicating now is probably the time to buy for those interested in the real estate sector.
- Twice as much money is going into "put" options than "call" options in 206 real estate stocks. Ratios this high have occurred at price lows in the past.
- Puts to calls ratios of the Vanguard Real Estate Index (VNQ) confirm this.
HT Ganzo
Put Buying in 206 Real Estate Stocks Signals Bottom
Puts to Calls Contract Ratio in 206 Real Estate stocks (Michael McDonald)
Investors are purchasing a lot more puts than calls in 206 real estate stocks. History shows this usually occurs at a major price low. We've indicated with three green arrows the correlation of high ratios with past price lows. For price reference, we plot the ratio against the Vanguard Real Estate Index (VNQ). While economic factors determine what you should buy, investor sentiment in the form of puts and calls ratios can help one decide "when" to buy. The theory behind this is fully explained in this article.
This ratio of contracts is confirmed by another number; the ratio of the amount of money going to puts versus calls. As the graph shows, almost twice as much money is going into puts than calls in the 206 stocks. In the option world, the word "premium" refers to money.
Puts to Calls Dollar Ratio in 206 Real Estate Stocks (Michael McDonald)
We also form a ratio of the number of put trades divided by call trades. This ratio tells us how broad the numbers are; are the first two ratios being formed from many trades or just a few, high dollar trades?
The current ratio of trades is 1.16, which means the numbers are broad-based.
Puts to Calls Ratio by the number of Option Trades in 206 Real Estate Stocks (Michael McDonald)
If an investor thinks the economic picture for real estate looks good, these puts to calls ratios are indicating it is probably the right time. Since investor sentiment alone can move prices 50% or more above or below true value, these are important considerations.
Every important real estate stock is included in these ratios. These include Prologis (PLD), American Tower (AMT), Equinix (EQIX), Crown Castle (CCI), Public Storage (PSA), Realty Income (O), Simon Property Group (SPG), Welltower (WELL), and VICI Properties (VICI).
The Vanguard Real Estate Index ETF
When we measure option activity in the Vanguard real estate ETF itself, we see similar ratios. The chart below shows there are currently 1.8 put trades for every call trade in VNQ.
Puts to Calls Ratio of Option Trades in VQN (Michael McDonald)
We also plot the daily number of put and call trades in VNQ. These are the actual numbers that form the ratio above. One wants to make sure the ratios are high because put buying is rising and not simply because call buying is falling.
The graph below shows this. While the number of call trades in VNQ isn't increasing (red line), the number of put trades is (green line). VNQ is averaging 223 put trades a day vs 123 call trades.
Average Daily Number of Puts and Call Trades in VQN (Michael McDonald)
If an investor has done their homework and thinks VNQ is the vehicle they want to use for the real estate sector, option activity in VNQ itself suggests it's probably the time to act.
The Puts to Call Ratio
The puts to calls ratio as a market indicator was created by Martin Zweig in 1971. It has a long, fifty-year history of working well at finding major lows and highs in the stock market.
It also works very well for market sectors and individual stocks. Since it's a statistical metric, it's important to get enough data points to be reliable. Sector analysis of puts and calls does that.
Puts and Calls Ratio for the entire Stock Market (Michael McDonald)
Summary
For those investors focused on real estate and are waiting for the right moment to buy, we feel the puts and calls ratio in both the entire 206 stock sector, as well as the VQN ETF, are pointing to this moment.
This article was written by
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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