Established Cash-Secured Puts Position in KB Home

A new position was established in KB Home (ticker KBH) by selling three September 18th, 2020 100% Cash-Secured Put options at the $34.00 strike price at $.75 when the price of KB Home stock was at $36.02 per share (5.9% above the strike price).  This is a moderately in-the-money position since the probability of assignment on the options expiration date was 72.5% when this position was established.

KB Home is a home builder with high exposure to entry-level built-to-order homes, a good niche in the current market environment.  This year's earnings are likely to be only slightly below last year's, but 2021 earnings are likely to be substantially above the good earnings that were achieved last year (2019), which is a metric the Covered Calls Advisor is currently looking for in companies to consider investing in.  Another positive feature is the location of its geographic markets -- almost half are in California and the remainder are in other states throughout the Sunbelt.  KB Home was originally identified by the Covered Calls Advisor when it recently appeared in the top 2% of companies identified by my acquirers multiple stock screener, a good indication of its current valuation.  Its financials are also attractive based on its current score of 8 on the Piotroski F-score, thus ranking it in the top 5% of all U.S. public companies on that metric.  

The 48.8 Implied Volatility for these KB Home Put options was very attractive to the Covered Calls Advisor since it is well above the current S&P 500 Volatility Index (VIX) of 26.0.   So the $222.99 ($.75 per share x 300 shares - $2.01 commission) is a nice premium to receive for these out-of-the-money (i.e. strike price below the current stock price) Put options.  The next earnings report on September 24th is after the September 18th options expiration date.

As detailed below, for this new KB Home Cash-Secured Puts position there is potential for a +2.2% absolute return in 18 days (equivalent to a +45.3% annualized return-on-investment).  


KB Home (KBH) -- New 100% Cash-Secured Puts Position
The transaction today was as follows:
09/01/2020  Sold 3 KB Home September 18th, 2020 $34.00 100% Cash-Secured Put options @ $.75 per share.

The Covered Calls Advisor does not use margin, so the detailed information on this position and the potential result detailed below reflect that this position was established using 100% cash securitization for the three Put options sold.

A possible overall performance result (including commissions) would be as follows:
100% Cash-Secured Cost Basis: $9,977.01
= ($34.00 - $.75) * 300 shares + $2.01 commission

Net Profit:
(a) Options Income: +$222.99
= ($.75 * 300 shares) - $2.01 commission
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If KBH is above the $34.00 strike price at the Sept 18th expiration): +$0.00
= ($34.00 - $34.00) * 300 shares

Total Net Profit (If  KB Home stock price is above $34.00 strike price at options expiration): +$222.99
= (+$222.99 options income +$0.00 dividend income +$0.00 capital appreciation)

Absolute Return (If KBH stock price is above $34.00 strike price at the Sept 18th options expiration): +2.2%
= +$229.99/$9,977.01
Annualized Return: +45.3%
= (+$229.99/$9,977.01)*(365/18 days)

The downside 'breakeven price' at expiration is at $33.25 ($34.00 - $.75), which is 7.7% below the current market price of $36.02.