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KB Home (NYSE:KBH - 12.89) was bombarded with bullish trading activity in the options pits yesterday, as roughly 15,000 calls changed hands, which was more than triple the security's average daily volume. Garnering the most attention was the out-of-the-money October 16 strike, which saw roughly 3,700 calls cross the tape -- 83% of them at the ask price, suggesting they were bought. These contracts traded at a volume-weighted average price (VWAP) of $0.14. Since open interest at this strike jumped by 3,495 contracts overnight -- along with the fact that implied volatility was up by 13.4 percentage points by the time the closing bell rang -- it's safe to say that new positions were initiated yesterday. By purchasing these calls to open, traders are predicting that the stock will climb north of $16.14 (strike price plus VWAP) by the time October options expire.
Meanwhile, the equity's front-month series of options also saw some notable call activity. More than 2,600 of these options were exchanged at the September 15 strike during Monday's session, with the majority crossing at the ask price -- again, pointing to buyer-fueled volume. Yesterday's VWAP for this out-of-the-money option was $0.09. This strike also saw an overnight rise in open interest of 2,466 contracts, while implied volatility ended 48.7 percentage points higher, suggesting that new positions were added here, as well. In this case, speculators will need the security to rise above $15.09 (strike price plus VWAP) by front-month expiration on Friday.
This surge in KBH call activity is par for the course, as evidenced by the equity's 20-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) call/put volume ratio of 2.73. In other words, calls bought to open have nearly tripled puts during the past month. Similarly, the stock's Schaeffer's put/call open interest ratio (SOIR) checks in at 0.88, confirming that calls outweigh puts among the front three-months' series of options. This ratio is docked in the 19th annual percentile, meaning traders have been more call-heavy toward the security less than one-fifth of the time during the past year.
KBH has certainly earned some technical bragging rights lately, as the equity boasts a 52-week gain of nearly 112%, and a year-to-date advance of more than 92%. What's more, the stock has outpaced the broader S&P 500 Index (SPX) by close to 44 percentage points during the past three months. On the charts, the security continues to trade above support at its 10-day moving average, which has been guiding the stock higher since early August.
Despite this show of technical strength, most of the analysts covering the homebuilder seem wary of KBH. Only three "buy" or better ratings have been handed out, compared to nine lukewarm "holds" and three "sell" or worse recommendations. Additionally, Thomson Reuters shows an average 12-month price target of just $10.55, representing a discount to Monday's closing price of $12.90. This leaves plenty of room for future upgrades and/or price-target hikes, which could push the stock higher.
It should also be noted that KBH is due to report quarterly earnings this Friday, Sept. 21, and has bested analysts' bottom-line projections in three of the past four quarters. Should the company turn in another earnings surprise, Monday's bulls could end up securing a decent profit.