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KB Home Option Trader Braces for a Bumpy Ride

One speculator could be buying options 'insurance' on KBH

by 11/2/2012 9:47 AM
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The shares of KB Home (NYSE:KBH - 16.75) have muscled more than 145% higher in 2012, with the most recent leg of their uptrend highlighted by support from their 10-day and 20-day moving averages. However, it looks like one options trader is either betting on an intermediate-term pullback for the housing stock, or is protecting a long stock position.

During the course of yesterday's session, a block of 18,000 January 15 puts change hands at the ask price of $0.99, suggesting they were bought. Furthermore, all of the contracts translated into new open interest at the out-of-the-money strike. By purchasing the puts to open, the buyer has one or two motives: to profit from a retreat beneath the $14.01 level (strike minus premium paid), or to "insure" an appealing sale price for the shares, should KBH backpedal. However, the protective put buyer is a shareholder above anything else, so his or her primary goal is for KBH to extend its upward momentum.

Whatever the case, KBH is no stranger to bearish option betting. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock's 10-day put/call volume ratio sits at 1.18 -- just six percentage points from a 52-week peak. Or, in simpler terms, option traders have bought to open KBH puts over calls at a near annual-high clip during the past couple of weeks.

That skepticism is also prevalent elsewhere on Wall Street. Despite KBH's impressive ascent, just three of the 16 analysts following the stock deem it worthy of a "buy" or better rating. Likewise, the consensus 12-month price target on the equity rests at a meager $14.19, representing a discount to KBH's closing price of $16.47 on Thursday.

Meanwhile, short interest accounts for a whopping 40.6% of KBH's total available float. In fact, it would take close to a week to repurchase all of these pessimistic positions, at the stock's average daily trading volume.

As KBH resumes its quest for new highs, an unwinding of bearish bets in the options pits, a flood of upbeat analyst attention, or a short-squeeze situation could all act as contrarian boons for the shares.

Right out of the gate, KBH has added 1.7% to flirt with the $16.75 level.


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