Investors Weigh Options: Selling Puts on KB Home Shares

Investors interested in KB Home (Symbol: KBH) shares, currently priced at $53.56, may find selling put options to be a viable alternative strategy. Notably, the January 2027 put option with a $35 strike price has a bid of $2.55. Collecting this premium could yield a 7.3% return relative to the $35 obligation, equating to a 4.3% annualized rate of return.

Understanding Option Selling Risks

It’s important to note that selling a put option does not provide investors with the same upside potential as owning shares. A put seller will only acquire shares if the option is exercised. Exercising the put at the $35 strike would only be advantageous for the counterparty if it results in a better outcome than the current market price. Therefore, unless KB Home’s stock declines by 35.2% and the option is exercised, the seller’s only profit comes from the premium, leading to the aforementioned 4.3% annualized return.

Comparing Returns: Puts vs. Dividends

Interestingly, this 4.3% annualized return from selling puts surpasses the 1.9% annualized dividend offered by KB Home, which is based on the current share price. Should an investor purchase shares solely to collect dividends, they would face a greater risk, as the stock would need to drop by 35.2% to hit the $35 strike price.

Considering Dividend Stability

When analyzing dividends, it’s crucial to understand their inherent unpredictability, which is often tied to a company’s profitability. Examining KB Home’s dividend history can provide insight into the likelihood of maintaining the 1.9% annualized yield.

Historical Performance Insight

Below is a chart illustrating KB Home’s trailing twelve-month trading history, with the $35 strike price indicated in green:

This chart, along with KB Home’s historical volatility, serves as a valuable resource in evaluating whether selling the January 2027 put at the $35 strike for a 4.3% annualized return reflects an acceptable risk-reward balance. We calculate the trailing twelve-month volatility for KB Home, based on the last 250 trading days and the current price of $53.56, to be 36%.

Current Market Activity

As of Tuesday afternoon trading, there were 989,148 put contracts and 1.21 million call contracts among S&P 500 components. This results in a put-to-call ratio of 0.82, indicating a higher-than-normal number of put buyers compared to calls, as the long-term median ratio stands at 0.65.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.