Earnings trade prep starring KB Home

Here are some tidbits from my earnings Trade Review for $KBH up to this point:

KBHI start out by doing a simple Daily chart with MACD & Volume turned on. I draw at least one Horizontal Support line. Since I utilize Options a great deal in constructing Earnings Trades, I poke around in the various Option Chains looking for anything that stands out. In reviewing the July chain, I noticed the OI (Open Interest) at the July 14 Put. Here is a Daily chart of that Put:

KBH_July_14_PutThe bulk of this activity was initiated on Feb 12/13. Now on to how I construct a trade.

I utilize a spreadsheet with some formulas that allow me to plug in various strikes and prices to determine a trade design that meets all my criteria. I am Bullish on housing so I wanted some upside, but I don’t want to pay for the trade (as close to free as possible, or a credit). LOL.

Here is an example design that has my interest:

KBH_trade_ideaHere is a breakdown of this trade idea:

  • Long the April 21 Call
  • Short the May 22 & 23 Call (1/2 position size each)
  • Short the May 18 Put (1 part of a Put Calendar)
  • Long the Apr 18 Put (the other part of a Put Calendar)

Whew!

To illustrate how this trade could play out post-earnings, here are a few scenarios:

Scenario #1

Price moves very little. The long April 21 Call would remain in the money and the short May Call pieces would likely move just slightly. I would consider buying back the May 23 Call piece if reasonable to do so. The Put Calendar would likely have some minor price movement and I would likely close those 2 pieces.

Scenario #2

Price moves to $23. I would sell the 3 Call pieces that make up the Call Calendar. I would also unwind the Put Calendar pieces and close the trade.

Scenario #3

Price goes to $20. I would likely buy back the short May Call pieces at this point. The Put Calendar would still be out of the money so would likely wait to see if price holds this $20 level for a day or two. This would leave me with the long April 21 Call to play for a rebound.

Scenario #4

Price goes to $18. Oh boy. I would certainly buy back the short May Call pieces at this point. I would unwind the Put Calendar pieces. This would leave me with the long April 21 Call to play for a rebound.

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