Options Corner: KBH Earnings Preview Amid Sharp Pullback

0:00time now for options corner joining us for a look at the chart first plus an example trade after this Tom white senior options contributor all right Kaby home so under some pressure year to J but I guess not it's bad to say last year what do we know it's about the chart Tom well I've got a first thing to take a look at it I've got a chart comparison chart versus the XHB which is the ETF on the home builders and then also Lanar I threw in here to because they've already reported earnings a couple weeks ago and that one is severely underperform you see down about 43% on this chart compared to Kaby homes down also about 22% and then XHB which is the ETF that covers most of the major home builders is down only about not or down about 9% so you look at the comparison here and Lanar is lagging right Lanar is the lowest cost entry point as far as the home builders goes this is a first home buyer this is that one

1:03step up from that first home in that area as far as average selling price Kaby home about in the middle and about the $450,000 a home range so what impact is higher interest rates going to have on this sector we've already seen the weakness there now we've got the 30-year mortgage rate starting to tick up a little bit higher expectations are for year over year slowdown not surprisingly as we've seen consolidation in our re-acceleration in interest rates here but I've got another chart here kind of you know kind of clarifies what's going on as far as the direction that we've seen the stocks down about 16% so far this month and that's not surprising because we've seen the 10-year yield which isn't the same as the 30-year mortgage rate but it sets the tone for mortgage rates here the 10-year yield has risen over 40 basis points just this month of March so in these earnings that are coming out for Kaby home you've

2:04got to look at the results which are supposed to be a slowdown from last year but then also look at guidance because most of the results from this earnings event aren't built in to the numbers that we're going to receive so keep that in mind it's got to watch guidance but you look at here on a one-year one-day chart we've seen that pullback slight pullback but then you're starting to see this big dip that we had I mean this stock was trading about $67 just over a month ago and now we're trading around $53 so severe pullback in the shares you're seeing this convergence of the 50-day moving average which is on top of just under 60 bucks a share below that might trigger below this 200-day moving average so a death cross coming into play here that might be something to watch on a technical basis if we see continued selling because we saw that in Lanar also well I'm keeping it conservative if you want to own the shares

3:05it's got a nearly 1.9 percent dividend yield on an annual basis so we'll use this strategy that takes advantage of the pullback if you want to own the shares with the expectations that hey at least the stock consolidates maybe goes a little bit higher but you can create some yield on this type of strategy so I looked at a covered call strategy this this opt or this stock does not have weekly options so you have to go to the monthly so for every hundred shares of stock you buy in KB homes stock straight and currently around 53 you're selling out of the money call to the upside to create more yield and I looked at selling the April 55 strike call against buying the shares here you're going to pay a debit of roughly about 51-20 that's going to be your risk just over 50-100 dollars but that's if the stock goes to zero we know that's not going to probably happen so if you pay that 51-20 debit that's also going to be your break even that's where you start losing money below that so you're creating yield by selling that upside call and you're creating yield by owning the

4:08shares which allows you to collect that quarterly dividend now your gains are capped here but as you get closer to April expiration over the next 24 days you'll be able to roll that short call to a different option series or a different strike also that creates credits lowers your break even and increases potential profitability all right thanks Tom appreciate that that's how my co-host of fast market