Options traders are betting on big things when marquee homebuilder name KB Home reports earnings Wednesday afternoon, and with good reason.
Data released Tuesday showed that new home sales for May skyrocketed nearly 17%, compared with analyst projections of a 1.9% rise.
The XHB ETF, which tracks the homebuilder space, got a sizable boost on the data in Tuesday's session before pulling back with the rest of the market on Wednesday, but traders are betting that KB Home's earnings numbers will lead to another leg higher for the stock.
"This one traded more than two times its average daily call volume, and right now the options market is implying a move of about 7% [in either direction]. That's considerably higher than the 4.5% or so that it has averaged over the last eight quarters," Optimize Advisors CIO Michael Khouw said Tuesday on "Fast Money."
A large portion of the activity in KB Home options on Wednesday was on the bullish side of that implied move, with the most popular strike pointing to a double-digit move higher.
"Most of that activity was concentrated in the July 35-calls. Those were trading for about $2, and buyers of those calls are betting that the stock is going to rise above that $35 strike price by at least the $2 in premium that they paid, by July expiration."
KB Home would have to move at least 10% higher from Tuesday's close in less than a month for these contracts to become profitable, meaning that traders are betting on a fairly sharp rally out of earnings that could target the stock's February highs, when it was trading around the $40 level.
KB Home was trading 6.5% lower in Wednesday's session.