Take KBH Profits

Plus ITMN Update

By Bryan Bottarelli
Tuesday, March 20, 2007 10:41 AM EDT
Tue, 20 Mar 2007 14:41:00 GMT

Dear Bottarelli Research Member,

Let’s keep the profit string rolling today by locking in a quick gainer on our KBH April 45 Puts (KBH PI).

This morning it was reported that groundbreaking on new homes rebounded by 9% in February (after a 14% decline in January). Investors initially considers this good news and pushed the housing stocks higher — but a further look at the data revealed that the less volatile single-family building permits declined by 2.5%, which signals that the housing sector is still facing difficulties ahead. In fact, permits for single-family homes fell to a nine-year low — which is why low-end homebuilder KB Homes (KHB – NYSE) is trading lower today.

KBH

As you can see by the chart, our trading thesis that called the 200-day moving average resistance is playing out exactly as forecasted — as KBH’s early session rally was completely rejected at this level. This downside momentum has pushed our KBH April 45 Puts (KBH PI) from our $1.90 entry price up to $2.35 in today’s trading, so let’s go ahead and lock in our profits now!

PLAY: Sell your KBH April 45 Puts (KBH PI) at or above $2.30, good for the day.

At the same time, I’d like to address our position on InterMune (ITMN – NASDAQ). As I’ve said before, the company’s product pipeline and recent failed drug tests should not value the stock a penny over $10.00 per share. But as I write, shares actively trade for $22.40, which is a very ambitious price based on their potential. To play a further down-move, I originally recommended the ITMN April 20 Puts (IQY PD). But now, I’m thinking that we may need more time for the full downside move to play itself out. For example, the company announced today that they plan to cut 50% of their staff — and short-sighted Wall Street traders are applauding the news and pushing shares higher.

ITMN

Let’s be honest here. Gouging your staff by 50% to cut costs is not a long-term solution. It’s a pure survival play. And when I see moves like this, I can’t help but abandon my original viewpoint that the stock is severely overvalued. As a result, I’d like to “roll” our April position into a July position — which gives us more time for the stock to fall.

To execute this play, simply sell your ITMN April 20 Puts (IQY PD) at marketand then simultaneously buy the ITMN July 20 Puts (IQY SD) at or under $1.50, good for the day. Although this involves committing more capital to this position, it’s worth the additional funds to maintain our downside thesis going out until July.

ITMN ROLL PLAY: Sell your ITMN April 20 Puts (IQY PD) at market and then simultaneously buy the ITMN July 20 Puts (IQY SD) at or under $1.50, good for the day.

Lock and load

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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