After hitting multi-year highs recently, KB Home (KBH) has been pulling back, along with other homebuilders. However, this trader is still thinking that KBH is going to hold its current levels. If the shares were to fall below that strike price, though, then the trader will buy shares at that level.
This morning KB Home was up by 1.58%, bringing it to $20.51. Even though it has rallied hard along with its sector, it has been falling since mid-May, putting it now at a support level that goes back to the beginning of March. Doubling its action from last month, its options volume is rising above 8,000 contracts. When looking at the future for KB Home on the Ichimoku Cloud Chart, it appears to be growing at a steady rate.
Institutional Order Flow My Firm Flagged:
Trade: This trader sold 6,500 KBH June 20 puts for $.58 each.
Risk: $1,942 per one lot
Reward: $58 per one lot
Breakeven: $19.42
Cash Received: $377,00
My Trade: Buying the July 20 calls for $1.66
Risk: $166 per one lot
Reward: Unlimited
Breakeven: $21.66
Greeks of this Trade:
Delta: Long
Gamma: Long
Theta: Short
Vega: Long
Unusual Option Activity:
We define unusual option activity as large block trades that represent a large percentage of daily option volume. The block trade is considered "unusual" if the option volume is above the average daily volume over the past 22 days. At our firm, we scan and analyze order flow from all of the major options exchanges in order to identify any unusual option activity.
Analyzing unusual order flow gives traders a window into what the positions that large institutional players have. The majority of unusual option activity can be traced back to hedge funds, mutual funds, and other large institutions. Knowing where these institutions are placing their bets can be hugely advantageous for any trader. These institutions have informational and technological advantages that the average trader doesn't have, and the amount of time and analysis that goes into every one of their trades is substantial.
Order flow can however at times be deceiving. One might logically thing that a large block buyer of calls is bullish on the underlying. This is not always the case. Remember that a large number of participants in the equity options market are hedgers. Long calls are a hedge against short stock, and long puts are a hedge against long stock. With this in mind we have developed a seven-step trading plan that helps filter out unusual option activity that will not provide actionable trade setups. It is by using this plan that we are able to identify the most significant unusual options activity trades every day.