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February 13, 2013  Wed 2:14 AM CT

KBH: SEE CHART GET CHAIN FIND STRATEGIES
KB Home hit its highest price in nearly three years yesterday, and one large trader is betting that it won't fall hard in the next five months.

About 19,000 July 14 puts were sold yesterday, including 13,200 that traded at the same second for $0.30, according to optionMONSTER's tracking systems. Open interest in the strike was a mere 310 contracts before the trading began, clearly showing that these are new positions.

These put sellers are looking for the homebuilder to stay above the $14 strike price through expiration in mid-July. If KBH drops below that level--a decline of about 29 percent from yesterday's close--the traders will face the obligation to buy the shares. (See our Education section)

KBH rose 5.76 percent yesterday to $19.64 after peaking at $20.04 earlier in the session, the first time it has breached the $20 mark since April 2010. Total option volume in the name exceeded 41,000 contracts yesterday, more than triple its daily average for the last month.
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As discussed last week, when using the Stock Replacement Strategy to replace a stock position to trade direction, we want to use an option that has very similar characteristics to the stock. We talked about using the deep in-the-money, 80 to 85 delta option that is similar in the Greeks and has relatively little extrinsic value which tends to work against us in stock directional trading.

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