How to bet against real estate using options as higher rates pressure housing market
The 10-year Treasury yield has been on an upward trend since September, now reaching its highest level since late July. As a key benchmark for long-term interest rates, including 30-year fixed mortgage rates, this rise in yields is exerting negative pressure on the real estate sector. With this in mind, I’m looking to capitalize on the continued pressure on real estate as long as yields keep climbing. Below is a 6-month daily chart of the iShares U.S. Real Estate ETF (IYR) , which tracks the performance of U.S. real estate-related equities. Notably, IYR is facing strong resistance around the $104 level and appears to be getting rejected at this zone. The options chain for Nov. 8 shows that there is a 68% chance that the $102 call will expire worthless by expiration date. The trade Given the bearish outlook, I’m utilizing a bear call spread, also known as a call credit spread. The strategy involves selling a $102 call option and buying a $103 call option as a single unit. This brings in a premium of $33 which offers a great risk/reward ratio for this trade. More contracts can be added to increase risk/reward for this trade. Here is my exact trade set-up: Sell $102 call, Nov 8th expiry Buy $103 call, Nov 8 th expiry Credit: $33 Credit spread trades like this present a strong likelihood of success, with an expectation that roughly 7 out of 10 trades will be profitable. However, it’s important to note that while the winning trades often generate modest gains that build over time, the losing trades can lead to larger, more impactful losses. This underscores the importance of having a solid risk management plan in place. When managed carefully, credit spreads can provide consistent returns over the long run. -Nishant Pant Founder: https://tradingextremes.com Author: Mean Reversion Trading using Options and Technical Analysis Youtube, Twitter: @TheMeanTrader DISCLOSURES: (None) All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, NBC UNIVERSAL, their parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium. THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.