Options Activity for KBH & LEN
Wednesday, August 25, 2010
I hope that your trading is going well, as I know that members of S.O.M.E. are making the most of the market movements and their returns.
Sales of new homes in the United States fell to all-time record low in July, the Commerce Department reported earlier today. Sales for July dropped 12.4% to a seasonally adjusted annual rate of 276,000, from a downwardly revised 315,000 in June. While many could see this report coming -- with the homebuyer tax credits recently expiring -- the extent of the decline surprised economists.
Two companies that have undoubtedly been affected by weak home sales are homebuilding concerns KB Home (KBH) and Lennar Corporation (LEN). Let's examine how option players are responding in the wake of today's news, while taking a brief look at each stock's sentiment and technical backdrops.
KB Home (KBH)
Put players have pummeled KBH today, with 1,643 contracts changing hands so far -- 1.6 times the stock's expected single-session put volume of roughly 1,000 contracts.
The September 10 put has attracted quite a bit of attention today, with 356 contracts crossing the tape -- the bulk of which traded at the ask price, indicating they were likely bought.
However, with 2,135 contracts currently open at this strike -- site of peak put open interest for the September series -- it's difficult to tell whether these puts were, in fact, newly added. KBH is currently trading at $10.30, though, so these puts are right at the money.
Elsewhere on the Street, the shorts are also betting on additional losses for KBH. Short interest surged by 17% during the past month, and now accounts for a hefty 22.1% of the stock's total available float.
Technically speaking, KBH has been trending steadily lower since peaking above $20 in April. Throughout this time, the shares have been guided steadily lower by their descending 10-week moving average -- now located around $11 -- which has swiftly rejected all of KBH's advances during the past few months.
However, since July KBH seems to have found a technical floor at $10. The past few days, though, KBH has hovered both above -- and below -- this important level. Going forward, this round number will be one to keep a close eye on, as a weekly close beneath it could spell trouble for KBH.
Lennar Corporation (LEN)
Meanwhile, LEN has seen a surge in call volume today, with 8,797 of these bullish bets changing hands -- triple the homebuilding concern's usual daily call volume.
The October 14 call has seen the bulk of today's call volume, with 5,286 contracts changing hands -- 82% at the ask price, suggesting they were purchased. With a mere 183 contracts currently open at this strike, it seems that the majority of these calls are, in fact, fresh positions. By buying to open the October 14 call, traders are counting on LEN to muscle above the $14 level over the next two months. The stock is currently trading around $13.19.
Option players are generally optimistic about LEN, as evidenced by the equity's put/call open interest ratio (SOIR) of 0.81, which falls in the 10th annual percentile. In other words, short-term traders have been more bullishly aligned toward LEN just 10% of the time during the past year.
Technically speaking, LEN hasn't done much to inspire such confidence, with the shares underperforming the broader S&P 500 Index (SPX) by 20% during the past 60 sessions. Since April, LEN has been slipping steadily lower, a descent which has been driven by its unrelenting 10-week moving average. This trendline is currently docked at $14, and has rejected all of LEN's rally attempts since mid-May.
With LEN docked under stiff trendline resistance, it seems unlikely that the stock is going anywhere anytime soon. Should the bulls grow weary of LEN's technical situation, a reversal of sentiment from the options pits could help continue the homebuilder's latest descent.
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