The quote comes from long time market watcher Scooby Doo.
What got me thinking about REITs today was an article on TheStreet by Gregg Greenberg. The article did a brief compare and contrast of the four different REIT ETFs. Two of the REITs, iShares Dow Jones US Real Estate (IYR) and iShares Cohen & Steers Realty Majors (ICF), have options available which I thought would tie into the article the other day about ETF options.
The options market often communicates different messages by the way it prices options. The options for both IYR and ICF seem to me to be implying a big move in the shares. IYR yields 3.9% and ICF Yields 4.88% (I got both yields from iShares.com). This won't be an apples to apples comparison to the other article but the June 121 options for IYR (the underlying is at $117.67) were bid at $3.10. The May 135 options are bid at $2.60 (the underlying is $130.06). I could have this upside down for all I know but these premiums seem very high given that the funds have betas in the 0.60's.
Compare those premiums to Equity Office Prop (EOP), a large component of both ETFs. A July 30 call is bid at $0.75. Usually premiums for ETFs would be much lower, in real terms, than premiums for the components of the ETFs. In this example it seems kind of close, closer than it should be anyway.
I believe that this situation is the market's way of communicating a big move may be coming. So would this mean a big move up or down? I'm inclined to take the under here. REITs have had a great run for a long time, and eventually they will lag. I see two risks if someone wants to try to sell these call options. If the ETFs go down a lot the call premium will only absorb a small portion of the loss, if the ETFs go up a lot money might get left on the table.
Where selling these options may make more sense is if you have owned either of these ETFs for a while. They are both up nicely in the last year. If you are already up 15%, or more, on these the $3 premiums look more compelling.
Kaushik, feel free to weigh in here.
For what it is worth most of my clients own only one of the big REITs. It has a big dividend and a lower beta than the ETFs.
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4 comments:
Roger,
For IYR, ivolatility.com shows the following:
* Historical volatility 52-week range: 6% - 35%
* Implied volatility 52-week range: 12% - 28%
Moreover, both these volatilities have been ~20% recently.
Now, with the IYR June $121 Call at $3.5 (in between the 3.1 bid and $3.9 ask), we can calculate the implied volatility using the "basic calculator" at http://www.ivolatility.com/calc/:
Call I.V. - 16%
Similarly, for the IYR June $114 Put, I.V. = 17%.
So I don't think that any of these options are mis-priced or indicative of a large move.
My 2 c.
-Kaushik
www.galatime.com
Or maybe I have upside down. Thanks Kaushik!
You manage people's portfolios and make a big call about real estate ETF's volatility without even doing that tiny little bit of homework? God help your clients.
I don't think I made a big call, I think I shared a thought process. I then solicited an outside opinion. I thought about that opinion and then followed up a day or two later about that outside opinion. Lastly I shared how I have my clients positioned.
Just so we are clear, the primary purpose of this blog is to share my thought process. If you have read this blog for any length of time it should be abundantly clear that this is a diary of how I think and try to learn.
My guess is the person that left this comment linked over from Motley Fool and has spent no time reading the blog, but I could be wrong:-)
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