Mortgage REIT Two Harbors Investment Corp (TWO) has seen shares slow from a strong rally in recent months to a more sideways trend. One trader is betting that shares are due for a drop.
That’s based on the May 21st $7 puts. With just over a month left on the trade, and with shares around $7.40, the put option will move higher on a drop in shares. Over 10,160 contracts traded, a 28-fold rise in volume from the prior open interest of 367.
The buyer of the put options paid about $0.18 on average.
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The REIT has seen a rise in revenue and earnings in the past year, and shares have moved higher by over 60 percent from the March lows. However, with a rise in refinancings, the inherent leverage of mortgage REITs, and a real estate market with extended foreclosure protection, a move down is possible.
Action to take: The puts are an inexpensive bet on today’s overbought markets and can likely deliver high-double-digit gains on a down day for shares in the next month.
Overall, investors may want to look at going long shares following a pullback, given the high current income. The company increased its payout last year, and shares now yield just over 9.1 percent.
Disclosure: The author of this article has no position in the stock mentioned here, and has no intention of starting a position in the next 72 hours. The author receives no compensation from any of the companies mentioned in this article.