It May Be Time to Buy Options Insurance on This Red-Hot REIT

The shares of real estate investment trust (REIT) Starwood Property Trust (STWD) have been on fire in 2019, adding about 14% year-to-date. The equity is now within striking distance of its early August highs, yet a recent options signal suggests STWD bulls may want to buy options insurance.

Starwood shares closed Wednesday at $22.52 — not even a point from their Aug. 2 peak of $23.04. The stock is now face-to-face with a familiar roadblock on the charts, as the $22.60-$22.70 region has rejected several rally attempts since that peak.

Meanwhile, STWD’s short-term options are a bargain right now. The stock’s Schaeffer’s Volatility Index (SVI) of 17% is higher than just 13% of all other readings from the past year, suggesting near-term options are pricing in relatively modest volatility expectations.

Since 2008, there have been three other times when STWD was within 2% of a 52-week high while simultaneously sporting an SVI in the bottom 20% of its annual range. The security was lower one month later after each of those signals, averaging a loss of 5.55%, per data from Schaeffer’s Senior Quantitative Analyst Rocky White. From current levels, a similar pullback would place the equity around $21.27.

Against this backdrop, Starwood shareholders concerned about another retreat should consider buying protective puts while they’re on sale. The April 22.50-strike put was last asked at just 50 cents, or $50 per contract (premium x 100 shares per contract).

Unlike a “vanilla” put buyer, whose goal is to profit from a stock’s decline, a protective put buyer is still hoping the underlying shares rally. The bought puts merely lock in an acceptable selling price ($22.50, in this case), should the security take a turn for the worse and breach the strike within the options’ lifetime.