Following months upon months of standout jobs reports, the narrative for specialty finance firm Pennymac Mortgage (PMT) seems rather discouraging, to put it diplomatically. Yes, a robust labor market is what society seeks yet it can also be a double-edged sword when dealing with inflation. After all, an increase in gainfully employed individuals translates to more dollars chasing after fewer goods – that’s inflationary.
Not surprisingly, then, traders in the derivatives market have let their voices be heard. From the face-value interpretation – and upon a closer inspection into the granularity – Friday’s pricing dynamics for PMT stock suggest that traders are overall bearish. Fundamentally, that makes sense. Based on the present economic situation, it’s uncertain whether the Federal Reserve will lower interest rates after this summer season or not.
Chances are, a dovish framework – if it ever materializes – won’t materialize until we’re closer to the 2024 election. Such a pessimistic mentality is actually reflected in the latest options trades for PMT stock. Still, before you jump onboard the bearish bandwagon, there is a key nuance to consider. First, let’s take a look at the latest rumblings in the derivatives arena.
Unusual Options Activity Points to Pessimism in PMT Stock
As alluded to earlier, little room for alternative interpretation exists regarding Friday’s derivative market activity. When the closing bell rang out, PMT stock represented one of the top “highlights” in Barchart’s screener for unusual stock options volume.
Total volume hit 4,078 contracts against an open interest reading of 16,648 contracts. The swing up in activity was indeed extremely unusual. Against the trailing one-month average metric, Friday’s volume represented a 1,020.33% spike higher. Unfortunately for the bulls, this increased activity likely doesn’t favor them.
Breaking down the details, call volume only came up to 91 contracts. By mathematical deduction, that leaves 3,987 contracts on the put side of the volume ledger. This pairing resulted in an underlying put/call volume ratio of 43.81 (with of course a higher number indicating greater engagement of put options over calls).
Now, for every option that is bought, it also naturally must be sold. Barchart’s options flow screener provides a greater insight into the transactional character. That’s because this data interface exclusively focuses on big block transactions – none of the one or two contracts exchanged between small retail investors.
In the case of PMT stock derivatives, the net trade sentiment sits at $76,500 in favor of the bears. Looking at options with potentially bearish trading sentiment, Barchart identified heavy activity for a single contract: the Sep 20’24 12.50 Put. Stated simply, large entities (or individual accredited investors) are aiming to profit on the potential downside action of PMT stock, which could materialize between now and the Sept. 20 expiration date.
Checking the calendar, the aforementioned expiration date will be the final trading session of summer 2024. This trade carries fundamental significance. Basically, it’s broadcasting that the smart money does not believe an interest rate cut will be coming this summer.
If so, you’ve got to imagine that a financial services firm specializing in mortgages probably won’t perform well. With Barchart’s Technical Opinion indicator rating PMT stock a 72% Strong Sell, the bearish bet seems like a slam dunk.
Wager Against Pennymac Mortgage? Not So Fast!
Frankly, I’m not gung-ho on the residential real estate market. Even with a reduction in borrowing costs, inflation has taken a beating on the consumer. Further, with mass layoffs still materializing – especially in the tech sector and other white-collar industries – the housing sector appears challenged no matter what.
Nevertheless, it’s impossible to predict with 100% accuracy the reactions of other (human) investors. If the Fed pulls a summer surprise and actually lowers rates sooner than expected, that could boost PMT stock, irrespective of actual demand dynamics in real estate. Since affordability was strained even with low rates, it’s doubtful that such financial engineering could substantively alter the housing arena.
However, the anticipation of a robust shift could benefit PMT stock. And here’s the thing – an interest rate cut in the summer isn’t entirely out of the question.
According to Reuters, the four-week average of jobless claims from the latest readout “increased 5,500 to 232,750 last week. That was the highest reading since mid-September.” This statistic suggests that not everything is going well with the labor market.
Moreover, the unemployment rate for young people ages 20 to 24 years stood at 7.9% in May 2024. That’s noticeably higher than what it was in January 2020, when the metric came in at 7%. For comparison, the total unemployment rate last month was 4%, whereas in January 2020, it was 3.6%.
Society is starting to move into a circumstance where it’s no longer better off than it was just before the COVID-19 crisis. That could be the excuse for the central bank to lower interest rates.
So, the moral of the story? PMT stock looks like it’s going to fall. However, it probably might be more 60/40 rather than the 90/10 that unusual options activity is implying.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.