Options traders are feeling bullish on KB Home ahead of Wednesday's earnings report

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Options traders think KB Home is in for an earnings rally

KB Home heads into its earnings report after the bell on Wednesday up 67% on the year and fresh off an upgrade from Raymond James, who thinks the report will pave the way to more gains.

"We are making a preemptive move to upgrade three homebuilders (KBH, LEN, TOL) ahead of upcoming earnings announcements that we believe will reveal decidedly improved housing fundamentals and potential upside to current consensus FY20 estimates," wrote Raymond James in a note that came out early Wednesday morning.

KB Home is doubling up the performance of the XHB Homebuilders ETF, which is up a respectable 33% in 2019, and the options market thinks that outperformance will continue long after Wednesday's report.

"Where we saw the most activity was the October 32 calls. Those were trading for about $1.15. Any buyers of those calls are obviously betting [KB Home] is going above that $32 strike price by at least the $1.15 they paid," Optimize Advisors President Michael Khouw said Tuesday on "Fast Money."

Put another way, these traders are betting on a jump of at least 6% in KB Home between Tuesday's close and October expiration. As Khouw would point out, the average post-earnings move in the stock is right around 6%. These traders will likely breathe a sigh of relief that their thesis, and that of Raymond James, agree that the move will be to the upside.

Tuesday's optimism in the homebuilders wasn't limited to KB Home, either.

"We also saw some buyers of the April 32 calls [in KB Home], and also call buying in [Toll Brothers] and Lennar as well, so there was bullish activity in the homebuilders today," Khouw said.

While Toll Brothers won't report earnings until December, Lennar follows up KB Home's report on Oct. 2, and Toll Brothers will likely piggy back off of any results that show fundamental improvement in the space.

KB Home about 1.5% higher on Wednesday.

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