KB Home: Vol Drops as Stock Explodes; Isn't Upside Risk Too?

KB Home  (KBH) is a homebuilding company. The Company constructs and sells homes through its operating divisions under the name KB Home.

This is another vol note, but more holistic than the strike-by-strike view. There's an interesting phenomenon that can occur as vol dips in an abruptly rising stock. We can find depressed vol relative to the historical measures as the market reflects "lower risk" in an up trending stock. But, if you own gamma and the stock moves up more than the implied priced, well, you get the point... Down isn't the only direction that wins when owning gamma.

The Charts Tab (six months) for KBH is below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).



First, let's look to the stock portion on the top. I've highlighted the recent big move up. How big?... On 12-28-2011 the stock closed at $6.34. That's a 94.8% rise in about six weeks. On the vol side, check out how the HV20™ has been rising of late as the stock price has been moving up. But, as the actual realized volatility of the underlying has been rising, the implied has risen less. With the implied already trading below the historical measures before that gap has now opened up further. In English, the option market reflects lower risk as the realized vol has risen. Lest we forget, upward stock movement is volatility too. The vol comps are included below:

IV30™: 61.89%
HV20™: 75.44%
HV180™: 73.21%

Let's turn to the Skew Tab.



We can see similar shapes for all three of the front expiries and the front is elevated to the back monotonically for the all three.

Finally, let's turn to the options tab, for completeness.



The months are priced to 65.88%, 61.89% and 60.92%, respectively for Feb, Mar and Apr. The next earnings release is projected somewhere near the middle of Mar -- which straddles two expiries. Depressed vol in a rising stock and an earnings event is in interesting proposition.

This is trade analysis, not a recommendation.