KB Home (KBH) Pullback Fuels Fresh Round of Bearish Betting

There's an unusual amount of skepticism levied toward KB Home (NYSE:KBH), despite the homebuilder's impressive showing on the charts

Jan 6, 2017 at 2:38 PM
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Shares of KB Home (NYSE:KBH) are trading lower -- down 3.6% at $16.48 -- after Barclays struck a cautious tone on the homebuilding sector. Specifically, the brokerage firm said that while valuations look reasonable and it sees "evidence that home improvement will show another year of solid growth," margins could face pressure amid increasing land and labor costs. For KBH, specifically, Barclays initiated the stock with an "underweight" rating and a $15 price target. This skepticism has spilled over into the options pits -- where puts are once again outpacing calls -- with a number of traders eyeing a bigger pullback after KBH reports earnings next week.

Amid relatively light absolute volume, puts have the lead over calls by a more than 2-to-1 margin. The January 2017 16-strike put has seen the most action, and it looks like traders may be purchasing new positions. If this is the case, the goal is for KBH to surrender its foothold atop $16 by the close on Friday, Jan. 20 -- when front-month options expire -- a time frame that includes KBH's fourth-quarter earnings report, due after next Wednesday's close.

Today's put-skewed session just echoes the withstanding trend seen in KBH's options pits, though. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock's top-heavy 10-day put/call volume ratio of 5.19 ranks in the 84th annual percentile. Simply stated, puts have been bought to open over calls at a faster-than-usual clip.

Echoing this is KBH's Schaeffer's put/call open interest ratio (SOIR) of 5.84 -- which sits just 7 percentage points from a 52-week peak, meaning short-term speculators have rarely been as put-heavy toward the security as they are now. Additionally, put open interest across all series is perched at a 12-month high, with 123,866 contracts outstanding.

Drilling down, KBH's top open interest position is the deep out-of-the-money January 2017 10-strike put, where 23,289 contracts currently reside. However, it's the lofty accumulation of open interest at the previously mentioned January 2017 16-strike put that could likely have an impact on the stock's near-term price action. Today's activity notwithstanding, this near-the-money put is home to 16,490 open positions, and could create a layer of options-related support for KBH, as the hedges related to these bets unwind ahead of expiration.

Outside of the options arena, sentiment is tilted in a skeptical direction. For starters, nearly 22% of the stock's float is sold short, representing more than six sessions' worth of pent-up buying demand -- at KBH's average pace of trading. Plus, 85% of analysts maintain a "hold" or "sell" recommendation on the shares. Should KBH resume its longer-term uptrend or enjoy another positive earnings reaction next week, a capitulation from some of the weaker bearish hands and/or a round of upgrades could fuel the stock's fire.

In fact, even with today's decline, the stock is up more than 63% year-over-year -- and is within a chip-shot of its Dec. 8 two-year high of $17.38. Plus, the shares are finding a foothold in the $16.40-$16.50 region, home to KBH's September highs. What's more, the stock has only closed lower in the session subsequent to reporting in two of the last eight quarters.

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