Options Traders Swarm Homebuilders Amid Sector-Wide Rally

Homebuilders are hot following Toll Brothers Inc's (NYSE:TOL) earnings release

by Josh Selway

Published on May 24, 2016 at 1:48 PM
Updated on Jun 24, 2020 at 10:16 AM

Toll Brothers Inc's (NYSE:TOL) post-earnings rally has bullish options traders rushing to homebuilders today. For example, sector peers KB Home (NYSE:KBH) and Lennar Corporation (NYSE:LEN) are both seeing accelerated options trading, as is the sector's exchange-traded fund (ETF), the SPDR S&P Homebuilders ETF (XHB). Below, we'll take a closer look at how options traders are playing homebuilder stocks KBH, LEN, and XHB. 

Starting with KBH, call options are trading at four times their average intraday pace. Traders are targeting the 14 strike in both the June and July series of options, betting on KBH to eclipse the strikes before their respective expiration dates, at the close on Friday, June 17, and Friday, July 15. 

With its 7.1% rally today, KB Home (NYSE:KBH) is now trading at $13.63 -- 10.5% higher year-to-date, thanks in part to its own post-earnings pop in March. However, KBH earlier topped out right at its downtrending 50-week moving average, a level that guided the homebuilder lower during the tail end of 2015. 

LEN options are trading at four times the expected intraday pace, but it's actually puts that are seeing more activity. The June 46 and July 44 puts are the most popular, and if traders are buying to open the options, they're betting on LEN falling below the strikes before the contracts expire. 

This skepticism may be the result of Lennar Corporation's (NYSE:LEN) previous rally attempt earlier this year, which stalled in the $48-$49 neighborhood -- home not only to LEN's year-to-date breakeven mark, but also to its 320-day moving average. At last check, the stock was 5.1% higher at $46.23, quickly approaching the potentially double-barreled layer of resistance.

As for XHB, the ETF's call options are trading at three times their average intraday volume. One of the most popular options is the weekly 6/10 34-strike call. It appears traders are buying new positions, expressing confidence in XHB topping $34 within the next three weeks. 

Unfortunately, it looks like the SPDR S&P Homebuilders ETF (XHB) could have trouble with the $34 level. The ETF's descending 200-day moving average currently resides around this mark, as does its year-to-date breakeven level. In fact, XHB seems to be stalling right below this area, last seen 2.9% higher at $33.92. 

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