KB Home is a home builder with high exposure to entry-level built-to-order homes, a good niche in the current market environment. In this regard, there are three primary circumstances that provide the most conducive environment for homebuilders' success: demographics, low interest rates, and current Monthly Supply of Houses in the U.S.(Source: Federal Reserve Bank of St. Louis). All three of these factors are currently very positive for homebuilders. In terms of demographics, ages 26-32 are the prime ages for first-time buyers and years 2020 to 2025 will see the largest number of young adults in this age category in U.S. history. In terms of interest rates, 10-year Treasury rates below 2.0% provides attractive, affordable financing for new buyers. The current rate is only 1.04% and mortgage credit is readily available. Finally, the most recent monthly reading of current supply of houses is only 4.1 months which is close to the all-time low (since 1963 when data was first measured) of 3.5 months. Historically, supply conditions remain attractive to builders until this inventory factor exceeds 7.0 months. Also in this regard, the NAHB Housing Market Index surveys homebuilders monthly on their current (and their estimates about the next 6 months) sentiment (from 0 to 100). This month's index is 83 -- also near an all-time high (since 1985) of 90 (Note: The lowest rating of 8 was in January 2009). So we are definitely now in a strong "sellers' market". The Covered Calls Advisor will continue to track these factors and will likely remain invested in monthly Covered Calls in companies in this industry as long as all three of these conditions remain positive.
Despite the pandemic, the most recent fiscal year's (2020) earnings exceeded 2019, and 2021 revenues are estimated to increase by 40% above 2020; and earnings by even more (+65%). Another positive feature is the location of KB Home's markets -- almost half are in California and the remainder are in other states throughout the Sunbelt.
The 47.1 Implied Volatility for these KB Home Call options was very attractive to the Covered Calls Advisor since it is more than twice the current S&P 500 Volatility Index (VIX) of 23.2. In addition, five analysts have raised their price target estimates since KBH announced their 4th quarter earnings on January 12th, 2021. The average target price of the 16 analysts covering KBH is now $44.08.
As detailed below, two potential return-on-investment results are:
- +2.0% absolute return (equivalent to +90.6% annualized return for the next 8 days) if the stock is assigned early (business day prior to the February 2nd ex-dividend date); OR
- +2.4% absolute return (equivalent to +34.9% annualized return over the next 25 days) if the stock is assigned on the February 19th options expiration date.
KB Home (KBH) -- New Covered Calls PositionThe Buy/Write transaction today was as follows:
01/26/2021 Bought 300 KB Home shares @ $41.34
01/26/2021 Sold 3 KB Home 02/19/2021 $38.00 Call options @ $4.08
Note: the Time Value (aka Extrinsic Value) in the Call options was $.74 per share = [$4.08 Call options premium - ($41.34 stock price - $38.00 strike price)]
02/03/2021 Upcoming quarterly ex-dividend of $.15 per share
Two possible overall performance results (including commissions) for this KB Home Covered Calls position are as follows:
Covered Calls Cost Basis: $11,180.01
= ($41.34 - $4.08) * 300 shares + $2.01 commission
Net Profit Components:
(a) Options Income: +$1,224.00
= ($4.08 * 300 shares)
(b) Dividend Income (If option exercised early on February 2nd, the business day prior to the Feb. 3rd ex-div date): +$0.00; or
(b) Dividend Income (If KB Home stock assigned at Feb. 19th, 2021 expiration): +$45.00
= ($.15 dividend per share x 300 shares)
(c) Capital Appreciation (If KB Home Call options assigned early on Feb 2nd): -$1,002.00
+($38.00 - $41.34) * 300 shares; or
(c) Capital Appreciation (If shares assigned at $38.00 strike price at options expiration): -$1,002.00
+($38.00 - $41.34) * 300 shares
+($38.00 - $41.34) * 300 shares; or
(c) Capital Appreciation (If shares assigned at $38.00 strike price at options expiration): -$1,002.00
+($38.00 - $41.34) * 300 shares
1. Total Net Profit [If option exercised on Feb. 2nd (business day prior to Feb. 3rd ex-dividend date)]: +$222.00
= (+$1,224.00 options income +$0.00 dividend income -$1,002.00 capital appreciation); or
2. Total Net Profit (If KB Home shares assigned at $38.00 strike price at February 19th, 2021 expiration): +$267.00
= (+$1,224.00 +$45.00 -$1,002.00)
1. Absolute Return (If option exercised early on Feb. 2nd): +2.0%
= +$222.00/$11,180.01
Annualized Return (If option exercised early): +90.6%
= (+$222.00/$11,180.01)*(365/8 days); or
2. Absolute Return (If KB Home shares assigned at $38.00 at Feb 19th, 2021 options expiration): +2.4%
= +$267.00/$11,180.01
Annualized Return (If KB Home shares assigned at $38.00 at Feb 19th, 2021 expiration): +34.9%
= (+$267.00/$11,180.01)*(365/25 days)
Either outcome would provide a very attractive return-on-investment result for this KB Home investment. These returns will be achieved as long as the stock is above the $38.00 strike price at assignment. If the stock declines below the strike price, the breakeven price of $37.11 ($41.34 -$4.08 -$.15) provides 10.2% downside protection below today's stock purchase price.
At least eight of the nine metrics used in the Covered Calls Advisor's Dividend Capture Strategy spreadsheet must be 'YES' prior to establishing a position. As shown below with this KB Home position, eight criteria were met.
