Homebuilders have started to show strength with many names approaching buy points. So, is now the time to consider an options trade in KB Home stock?
KB Home currently boasts an IBD Composite Rating of 96 and a top EPS Rating of 99. Shares are trending higher, currently above both their 50 and 200-day moving averages.
So, investors who are bullish on KB Home stock can consider buying a call option with a 35 strike price that expires Feb. 17. The cost of this option, recently near $1.15 per contract, equates to a maximum loss of $115 should KB Home trade below 35 on expiry.
Plus, if KB Home stock has a strong run, the profit on this trade is unlimited.
The housing sector has long been plagued with pessimism. Rising mortgage rates and a soft outlook for demand have depressed multiples. There certainly lies some weakness ahead. Nevertheless, with a lot of negativity priced in, interest rates stabilizing and homebuilders still reporting solid results, now may be the time to dip back into the sector.
KB Home Stock Today: Why A Long Call Now?
Long call options work as a great way for investors to gain upward exposure to stock while also limiting losses in the event the trade goes against them. The key for a long call is to pick a stock that an investor is bullish on while also making sure the options premium is not overpriced.
Headquartered out of Los Angeles, the company constructs new homes coast to coast, with a focus on first-time homebuyers.
This call on KB Home stock is currently trading with an implied volatility of 41%. This certainly appears cheap as KB Home has realized 49% and 46% annualized volatility over the past 30 and 252 days respectively.
While KBH likely realizes less volatility over the Christmas season, these options still have exposure to KB Home's Q4 earnings on Jan. 11.
KB Home stock has moved on average 5.7% on its prior earnings events. Q4 EPS is estimated at $2.86 on revenue of $2.04 Billion.
A Top Value Play?
KB Home has seen strong growth with earnings per share almost tripling from $3.13 in 2020 to an estimated $9.51 this year. While EPS is projected to decline 31% to $6.52 in 2023 — mainly due to softening new home sales — KB Home still provides great value. Why? The stock is currently trading with a juicy price-to-earnings ratio of 3.8.
That stands in stark contrast to the average 19.8 P-E ratio of the S&P 500.
