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Bulls Come Back to Homebuilders

Stocks in this article: KBH DHI

By David Russell, reporter at OptionMonster

NEW YORK -- Homebuilders have been pausing after a big run, and Monday momentum buyers came back to the group.

OptionMonster's tracking programs detected the purchase of 10,000 May 21 calls on KB Home (KBH) for 65 cents. This is fresh buying, as the volume was almost nine times higher than the open interest in the strike before the session began.

These long calls lock in price where the stock can be purchased no matter how high it might climb. Because they are cheaper than buying shares directly, these options limit the amount money that can be lost if the stock falls while offering the potential for significant leverage in a rally.

For instance, KB Home's shares were unchanged at $20.44 when the contracts hit and then pushed higher to end the session at $21.02, up 2.84%. The calls, meanwhile, appreciated more than 40% to 95 cents.

D.R. Horton (DHI) saw similar activity in the afternoon, with the May 21 calls bought for $1.65 to $1.80. The company, which reports quarterly results Thursday morning, rose 1.73% to $22.36. Its calls inched up to $1.90.

Homebuilders have been strong over the long term, ranking as the No. 4 group on our proprietary ResearchLab market scanner in the last 12 months. But they've lagged in the last six months or so, bringing many names back to potentially interesting levels.

Total option volume was more than eight times greater than average in each name.

Russell has no positions in KBH or DHI.

This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

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