Filed under: Major movement, Good news, Industry, KB HOME (KBH), Options, Technical Analysis, Politics, Housing

KB Home (NYSE: KBH) shares are rising with other homebuilders after US Senators from both political celebrations concurred to draft legislation that could deliver billions of dollars to homeowners facing foreclosure. The Senators hope to bring a bill to the floor as early as this afternoon. If you think that the company won’t fall by too much in the coming months, then now could be a good time to look at a bullish hedged trade on KBH.

After hitting a one-year high of $48.67 in May, the stock hit a one-year low of $15.76 in January. KBH opened this morning at $26.74. So far this day the stock has hit a low of $26.50 and a high of $28.86. As of 12:30, KBH is trading at $28.48, up $1.55 (5.8%). The chart for KBH looks bullish and steady, while S&P gives the stock a negative 2 STARS (out of 5) sell rating.

For a bullish hedged play on this stock, I would think about a May bull-put credit spread below the $17.50 range. A bull-put credit spread is an options position that combines the buy and sale of put options to hedge risk in case the stock doesn’t do what you think but still leverage nice returns. For this particular trade, we’ll make a 4.2% return in just 7 weeks as long as KBH is above $17.50 at May expiration. KBH would have to fall by more than 38% before we would begin to lose money. Learn more about this type of trade here.

KBH hasn’t been below $17.50 since January and has shown support around $24 recently. This trade could be risky if the housing market gets even worse, but even if that happens, this position could be protected by the support the stock might find around $22, where it bottomed out a few weeks ago.

Brent Archer is an options analyst and writer at Investors Observer.

DISCLOSURE: Mr. Archer owns and/or controls diversified portfolios of long and short stock and option positions that may include holdings in companies he writes about. At publication time, Brent neither owns nor controls positions in KBH.

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This entry was posted on Saturday, April 5th, 2008 at 8:10 pm and is filed under Industry News. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.