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September 27, 2011  Tue 2:13 AM CT

KBH: SEE CHART GET CHAIN FIND STRATEGIES
Option selling was the strategy of the day for the homebuilders in yesterday's session, including huge trades in D.R. Horton and KB Home that appear to be related.

The big trade in KBH came in the November 5 puts as 27,000 were sold at the bid price of $0.46. This was most of the volume for KBH and compared to open interest of just 141 contracts at that strike.

The November contracts were also the targted of DHI's activity, and in the same couple of minutes more than 20,000 November 10 calls were sold for $0.42. That too was the vast majority of the volume for the name and it was against open interest at that strike of 303, so this was also a new opening trade.

DHI finished the day up 3 percent to $9.45, again bouncing off support at $9. Shares were up above $12 coming into August before hitting that support and then bouncing to $11 at the end of the month before falling to support yet again.

KBH closed yesterday unchanged at $5.91 after climbing off the morning's lows. It has bounced off support at $5.50 several times in the last couple of months after trending down from $16 at the beginning of the year.

The close proximity of these transactions along with their size suggests that they were done as a pair trade. Selling the puts on the weaker stock and selling calls on the stronger is looking for some level of mean reversion. (See our Education section)
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