Whether as an investor or a buyer, the trajectory of the real estate market represents one of the most asked-about subjects in the broader financial industry. While no one has a crystal ball on the matter, investors may want to consider the pricing dynamics of sector-related companies such as Floor & Décor (FND). Usually, if housing demand is robust, the downwind segments like repair and renovation should likewise be viable.

If so, investors need to take a closer look at FND stock, particularly the underlying dynamics in the options market. Activity spiked for Floor & Décor, much more so than normal. More to the point, it appears that few are willing to take a bullish bet on FND, with put volume far exceeding calls.

Nevertheless, investors don’t enjoy a clear-cut case. Back during the initial onset of the COVID-19 pandemic, the Federal Reserve dramatically pushed down the benchmark interest rate. As a result, the Washington Post noted that the affluent took “advantage of the cheapest mortgage rates in history to buy bigger homes.”

However, as inflation skyrocketed to blistering heights, the central bank then reversed course quite dramatically, committing to a hawkish monetary policy to control escalating prices. This action tightened liquidity, resulting in much higher borrowing costs from the pandemic-fueled lows. Soon, both direct players in the real estate market as well as indirect entities – such as FND stock – suffered significant red ink.

On the other hand, Floor & Décor gave prospective investors something to think about. Last month, the company released its third-quarter earnings report, which came in better than expected. On the bottom line, it delivered adjusted earnings per share of 70 cents, beating the consensus EPS target of 66 cents. Also, this figure exceeded the year-ago quarter’s result of 60 cents.

On the revenue front, Floor & Décor generated $1.1 billion, up 1.21% against the consensus estimate. As well, the latest tally compared very favorably to Q3 2021’s sales of $876.55 million. Nevertheless, the derivatives market pulled a surprise of its own – and not a particularly pleasant one.

FND Stock Becomes the Subject of Unusual Stock Options Volume

Following the close of the Dec. 14 session, FND stock represented one of the highlights in Barchart.com’s screener for unusual stock options volume. This metric shows the difference between the current volume and the average volume over the past month. Usually, traders leverage this information to determine which stocks may be due for big moves ahead.

Specifically, FND’s volume level reached 9,432 contracts against an open interest reading of 26,954. Call volume hit 117 versus put volume of 9,315. The implied volatility (IV) rank hit 45.96%, which indicates the (at the money) average IV relative to the highest and lowest values over the trailing one-year period.

To quickly summarize, IV signifies the expected volatility of a stock over the life of an option. As certain influencing factors for the underlying investment changes, the IV will likely change as well. Further, as demand for an option increases, so too will its IV.

The IV low for FND stock was 32.47% on Dec. 31, 2021. Almost a year later on Oct. 20, FND hit its IV high at 69.06%. Prospective investors should note that per Barchart.com’s technical analysis gauge, FND ranks as an average 8% buy. In the open market, shares of Floor & Decor dropped 39% of equity value on a year-to-date basis. However, in the trailing five sessions, FND gained over 7%.

Finally, Wall Street experts are steadily growing in confidence regarding FND stock. Three months ago, analysts had a consensus view of “moderate buy,” broken down as nine strong buys and five holds. In the current month, the broader assessment remains the same. However, the analyst breakdown consists of 11 strong buys and five holds.

The Consumer May Be Tapped Out

Although Floor & Décor’s Q3 results presented an encouraging picture, it’s also worthwhile to note that market sentiment ultimately banks on what will be, not what was. Therefore, the latest data regarding the dramatic rise in put options arguably presents a more realistic picture of FND stock.

First, the Fed demonstrated no sign that it’s going to reverse course regarding its hawkish strategy. Per Barchart’s Rich Asplund, the central bank “increased the fed funds rate by 0.5% to a range between 4.25% and 4.5%. This is the highest level in 15 years. Fed officials said that rates will remain elevated through 2023 and expect a terminal rate of 5.1%. T-note yields rose, with the 10-year T-note yield up +0.035 bp at 3.543%.”

Second, the consumer might be tapped out in terms of spending power. A combination of the collapse of the personal saving rate and the skyrocketing of credit card debt to all-time highs suggests that after the home-buying boom, there’s not much left over to spend on renovations. That’s going to directly impact Floor & Décor, meaning that investors need to tread carefully with FND stock.

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