[Options] Turn Off the News and Buy Homebuilders

Sean McLaughlin
March 29, 2023

[9/7: updated stop to 48. We're already #FreeRiding here, so whatever we sell the remaining portion of the position for is pure profit!]

According to "the news," Americans can't afford to buy homes and rising mortgage costs will only deepen the problem.

Cool story, bro.

Do you know what disagrees? The price of virtually every publicly traded homebuilding company. We're already long Lennar and Toll Brothers which continue to work for us.

Next up is KB Homes $KBH, which appears to be on the verge of a big breakout following a welcome response to its recent earnings report.

Here's the chart of $3.3B homebuilding company KB Homes $KBH:

In the recent Minor Leaguers report, Steve Strazza said:

KB Homes is currently attempting to break higher from a 12-month basing formation.  The current level has acted as resistance in the past, making it a great place to define our risk and get long on a breakout.

Bulls want to see KBH take out this resistance level with a decisive upside resolution, and if/when it does, we’re buyers.

On a relative basis, KBH is in the process of working its way higher from a similar basing formation versus the broader market.

If we’re above 40, we want to own KBH with a target of about 52.50 over the coming 1-3 months.

$KBH has been holding above $40 for the past few trading days and just needs a spark to get going. I think that spark is coming soon.

Here's the Play:

I like buying $KBH October 50 calls for approximately $1.45 per contract. These calls sport a 25-delta and offer us great leverage if $KBH goes on a run. Of course, since these are out-of-the-money (OTM) calls, they have an increased likelihood of expiring worthless. Therefore, we'll size our position according to that math.

In the meantime, if $KBH builds upon its breakout, I'll look for any opportunity to sell half of my calls at double what I paid (limit order to sell at $2.90). If I get that fill, then I'll be left with half of my position and zero net capital risk in the trade, as I will have been paid back my original investment when selling half of the calls at $2.90. We call that a #FreeRide around here!

For risk management purposes, any $KBH closing price below $38 invalidates this play and I'll look to exit to prevent any further losses to my capital.

If you have any questions on this trade, please send them here.

ASO subscribers who missed last week’s video Jam Session where we reviewed activity in our options portfolio from the past week can catch it here.

~ @OptionsSean

P.S. We do trades like this regularly. If you'd like to leverage Best-in-Class technical analysis into smarter directional options trades, try out All Star Options Risk Free! Or give us a call to learn more: 323-421-7991.

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