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KB Home (NYSE: KBH) announced before the opening bell today that it posted a fourth-quarter loss of $772.7 million, or $9.99 a share -- a much wider loss than analysts' predictions of $1.08 per share. The company cited write-downs related to the sub-prime mortgage crisis in the earnings report. KBH Chief Executive Jeffery Metzger blamed continued "challenging market conditions" for the losses. If you think this stock won't be rising too far in the coming months, then it could be a good time to look at a bearish hedged play on KBH.After hitting a one-year high of $56.08 in February, the stock has hit a new one-year low today. This morning, KBH opened at $17.76. So far today the stock has hit a low of $16.67 and a high of $18.86. As of 2:00, KBH is trading at $17.53, down $0.95 (-5.1%). The chart for KBH looks bearish and improving slightly, while S&P gives the stock a neutral 3 Stars (out of 5) Hold rating.
For a bearish hedged play on this stock, I would consider an April bear-call credit spread above the $25 range. A bear-call credit spread is an options position that combines the purchase and sale of call options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. This particular trade will make a 6.4% return in 3 and a half months as long as KBH is below $25 at April expiration. KB Home would have to rise by more than 42% before we would start to lose money.
KBH hasn't been above 25 since November and has shown resistance around $24 recently. This trade could be risky if the housing market suddenly turns around, but that would probably have to happen pretty quickly to impact this position.
Brent Archer is an options analyst and writer at Investors Observer. At publication time, Brent neither owns nor controls positions in KBH.
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