KB Home calls build large profits

Bullish option positions yielded quick gains on a strong earnings report from KB Home.

On Monday afternoon, Investitute’s tracking systems detected the purchase of 2,000 July $23 calls for $0.56 to $0.67 with shares at $22.78. Volume was well above the strike’s open interest, showing that these were new positions.

This morning those calls ended today’s session trading for $1.25, more than doubling in value less than three full sessions later. The stock rose 5.6 percent in the same time frame, underscoring how quickly shares can far outperform their underlying shares.

Long calls lock in the price where investors can buy a stock, letting them position for a rally at limited cost with the potential for significant leverage. They carry less risk than owning shares because the most that can be lost is the price of the options no matter how far the stock might fall.

KBH rose 5.02 percent to $24.06 today. The homebuilder beat estimates on the top and bottom lines in its quarterly release after yesterday’s close.