KBH – KB Home – An investor hoping to see shares of the homebuilding company rise by January 2011 expiration constructed what looks to be a plain-vanilla debit call spread on the stock today. KB Home’s shares are up 0.70% at $11.35 as of 2:55 pm ET, but earlier rallied as much as 1.86% to touch an intraday high of $11.48. The bullish player picked up 10,000 calls at the January 2011 $14 strike for a premium of $0.50 each, and sold the same number of calls at the higher January 2011 $16 strike at a premium of $0.15 apiece. Net premium paid to initiate the transaction amounts to $0.35 per contract. Thus, the investor stands ready to make money if KB Home’s shares jump 26.4% over the current price of $11.35 to surpass the effective breakeven point at $14.35 by expiration day next year. Maximum potential profits of $1.65 per contract are available to the call-spreader should the price of the underlying stock surge 41.00% to trade above $16.00 by January expiration.
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Andrew Wilkinson is the senior market analyst at Interactive Brokers Group, where he provides daily commentary and analysis on U.S. equity options trading throughout the trading day. Andrew provides webinars designed to explain option-related trading scenarios covering futures, fixed income, forex and equities.
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