KBH 2017-07-24
I have been assigned the call from my last position in CTRL. That would have been approximately 8% gain for 33 days when I placed the transaction. The actual execution and the trading costs turned out to reduce the gain down to 5%. I created a page on slippage to detail this out. Having a small account these extra charges can dramatically change the profitability on a trade.
I bought CTRL at $19.72 and it closed at $23.32. By selling a covered call at $20.00 I missed the last $3.32 past that $20.00 a share. I am OK with this, because I was receiving a good return in a short time frame and it was a successful trade.
I now have cash available to find another opportunity. Over the past few weeks I’ve been researching Investor’s Business Daily for stocks between $15 – 30 that have earnings being released beyond the next expiration on the 3rd Friday in August 2017-08-18.
KB Homes KBH popped up, because it had the price range, technicals, and earnings are being posted September 26, 2017. I am looking to buy 100 shares at $23.30 and selling the Aug 18, 2017 $24.00 call
I bought 100 shares as a market order to be executed tomorrow 2017-07-23. I have considered placing a Good Till Cancelled order for the last closing price, but I decided to simply buy the stock and then sell the call later. I am expecting this to rise and would receive a better premium later.
The last price was 23.30 and looking at the chart I think that this may not hit this last price. If a GTC order for 23.30 is placed and if it doesn’t touch that price then the order would not be filled and I would miss owning this stock. I’m expecting that this to open higher and may not touch the 23.30 price point
This is a chart snippet from Bigcharts.com KBH. This stock looks like it has strong support at $23.oo a share. There was a huge spike in buying on strong volume at the end of June. This is a sign of Accumulation and the stock has been drifting off the new high on light volume
I will be legging into a covered call position. Right now the option premium is low <2%.
| Current Day | 2017-07-22 | |||
| Ticker | KBH | Max Cap Gain | 0.7 | |
| Current Price | 23.3 | Cap Gain Percent | 3.004291845 | |
| Strike Price | 24 | Yield | 1.716738197 | |
| Expiration Date | 2017-08-18 | Total Return | 4.721030043 | |
| Bid | 0.4 | Days | 27 |
A recommendation from Allen Ellman and most of the the books on covered call writing is: Do not sell a call during earnings reporting period. This is due to volatility. So, I then checked EarningsWhisper: KBH for the next earnings release. That is for Sep 26 so the Aug call option is available
Remember to do your own due diligence. This example is used to illustrate a trade.
I am looking to sell the $25.00 call, but will have a small profit selling the $24.00 call. The down side at an 8% loss would be $21.44 and based on the chart if this point is touched then the downtrend will be larger.
Checking the Fundamentals for a profitable company:
Gross Margin (TTM) 15.24%
Operating Margin (TTM) 4.84%
Pretax Margin (TTM) 4.63%
Net Profit Margin (TTM) 3.13%
Net Profit Margin tells you that out of every dollar of sale .03 hits the bottom line. These are low but the overall market action is positive
P/E excluding extraordinary items (TTM) 17.9 – This is low compared to industry. I am not bothered by high P/E ratios. William O’Neil discusses this at length and I highly recommend reading his books Reading List
P/E Normalized (MRFY) — 20.8 and is lower than industry average
P/Sales (TTM) .5 You’re buying the company 360% of revenue and anything under 2 is considered cheap.
They have some cash on hand:
Current Ratio (MRQ) —
Quick Ratio (MRQ) —
LT Debt/Equity (MRQ): 1.4
Total Debt/Equity (MRQ) 1.4
There is a large amount of debt based on the fundamentals from Scottrade, but IBD has Debt% at 0. This is a large discrepancy! This company is a leveraged company.
I like companies without a lot of debt, because that commits revenue. This company has no debt. So, if it needs quick cash it will be able to meet short term needs it will be able borrow for the money. This is why the Quick Ratio does not bother me.
Return on Equity (TTM) 7.17%
Sales (5Yr) 22.26%
EPS (TTM over TTM) 35.20%
Tangible BV per share (MRQ) 20.72 This should be bottom line in pricing for liquidation. The purchase price of 23.30 is only about 15% above this bottom level.
Let’s look how this is currently trading. Cover call strategy requires a positive overall trend. Starting with a longer view point helps give some perspective on the current trading cycle.
The charts are from bigcharts.com
5 yr chart. Looking at this if this stock clears the $24.00 resistance level then there will be a large gain.
Next 1yr weekly chart. This is above the 50, 100, and 150 day trend lines and they are spread out as a clear uptrend.
3 Month Chart. This is just above the 20 Day EMA. The MACD is still positive and Slow Stochastic is just off of an oversold condition.
Bryan
2017-08-13
KBH $22.70
The stock as been under pressure, but is not at the 8% stop loss limit at $21.43. This was slowly consolidating at $23 as share over the past couple of weeks and that price point held until…
Thursday 20017-08-09
KBH $22.50 – .70
This was on less than average volume and this was a bad day on the DJIA. This was on light volume and there is no aggressive selling. I am still holding on and may still write a call for next month.
I am also looking at another company in case KBH hits my stop loss. The desire is to keep the cash active in order to generate income. I am considering:
Planet Fitness – PLNT. The just posted earnings and the stock jumped.
Square – SQ. This is a volatile stock, but have no debt.
I will be waiting on how the next few days have traded. If I do not see active accumulation I will be rolling into another investment.
2017-08-28
I closed out my position yesterday, because my loss limit was reached. I bought 100 shares of SQ and will be updating my blog with the numbers
Sold 100 Shares of KBH at $21.34
This was at my 8% loss. So something was wrong with the market, sector, or company. I prefer to accept this in order to free up the capital for something new….