Established Covered Calls in KB Home

Today a new Covered Calls position was established in KB Home (ticker KBH) with a May 21st options expiration date.  A buy/write transaction was made with 300 shares purchased at $48.49 and three Calls sold at the $46.00 strike price for $3.11 per share. Given the Covered Calls Advisor's current cautious outlook, a moderately in-the-money Covered Calls position was established.  The Delta was 72.4 and this approximates a probability of 72.4% that the Call options will be in-the-money and therefore the stock assigned on the options expiration date. Two potential results for this Covered Calls position, as detailed below, includes the possibility of early exercise since the May 5th, 2021 ex-dividend is prior to the May 21st, 2021 options expiration date.

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.  Also, 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 which is near its 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, to approximately $5.80 per share (a forward P/E ratio of only 8.4).   

The 33.2 Implied Volatility for these KB Home Call options was attractive to the Covered Calls Advisor since it is substantially higher than the current S&P 500 Volatility Index (VIX) of 18.5.  Finally, the average price target of 15 analysts covering the company is $53.09 (+9.5% above its current price).  

As detailed below, two potential return-on-investment results are: 

•  +1.4% absolute return (equivalent to +99.7% annualized return for the next 5 days) if the stock is assigned early (business day prior to the May 5th ex-dividend date); OR 

• +1.7% absolute return (equivalent to +28.1% annualized return over the next 22 days) if the stock is assigned on the May 21st options expiration date.

 

KB Home (KBH) -- New Covered Calls Position
The Buy/Write transaction today was as follows:
04/30/2021 Bought 300 KB Home shares @ $48.49
04/30/2021 Sold 3 KB Home 05/21/2021 $46.00 Call options @ $3.11
Note: the Time Value (aka Extrinsic Value) in the Call options was $.62 per share = [$3.11 Call options premium - ($48.49 stock price - $46.00 strike price)]
05/05/2021 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: $13,616.01
= ($48.49 - $3.11) * 300 shares + $2.01 commission

Net Profit Components:
(a) Options Income: +$933.00
= ($3.11 * 300 shares)
(b) Dividend Income (If option exercised early on May 4th, the business day prior to the May 5th ex-div date): +$0.00; or
(b) Dividend Income (If KB Home stock assigned at May 21st, 2021 expiration): +$45.00
= ($.15 dividend per share x 300 shares)

(c) Capital Appreciation (If KB Home Call options assigned early on May 4th): -$747.00
+($46.00 - $48.49) * 300 shares; or
(c) Capital Appreciation (If shares assigned at $46.00 strike price at options expiration): -$747.00
+($46.00 - $48.49) * 300 shares

1. Total Net Profit [If option exercised on May 4th (business day prior to May 5th ex-dividend date)]: +$186.00

= (+$933.00 options income +$0.00 dividend income -$747.00 capital appreciation); or

2. Total Net Profit (If KB Home shares assigned at $46.00 strike price at May 21st, 2021 expiration): +$231.00

= (+$933.00 +$45.00 -$747.00)

1. Absolute Return (If option exercised early on Feb. 2nd): +1.4%

= +$186.00/$13,616.01

Annualized Return (If option exercised early): +99.7%

= (+$186.00/$13,616.01)*(365/5 days); or

2. Absolute Return (If KB Home shares assigned at $46.00 at May 21st, 2021 options expiration): +1.7%

= +$231.00/$13,616.01

Annualized Return (If KB Home shares assigned at $38.00 at Feb 19th, 2021 expiration): +28.1%

= (+$231.00/$13,616.01) * (365/22 days)

Early assignment is unlikely, but assignment on the expiration date would also provide a good return-on-investment result for this KB Home investment.  These returns will be achieved as long as the stock is above the $46.00 strike price at assignment.  If the stock declines below the strike price, the breakeven price of $45.23 ($48.49 -$3.11 -$.15) provides 6.7% 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 achieved.