Why Unusual Options Activity for Builders FirstSource (BLDR) May Point to an Earnings Surprise

Yahoo

6 days ago

With the housing market in a rough patch due to elevated prices and borrowing costs, it's no surprise that Builders FirstSource (BLDR) — the largest U.S. supplier of building products for new residential construction — has struggled. Since the start of the year, BLDR stock is down more than 5% while the benchmark S&P 500 index is up almost 7% during the same frame.
It's also worth pointing out that in the past 52 weeks, the security has given up more than 19% of market value. Frankly, it's not a great look for Builders FirstSource, which is scheduled to release its earnings results this Thursday before the opening bell. However, bold and adventurous speculators interested in a contrarian idea may want to keep their eyes on BLDR stock.
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First, Builders FirstSource represented one of the highlights of Barchart's Unusual Stock Options Volume screener. This nifty readout provides platform users with the top 500 securities that have incurred aberrant activity in the derivatives market relative to normal trends. Potentially, this screener can clue us in on what the smart money may be doing with its funds.
On Monday, total options volume for BLDR stock hit 6,231 contracts, representing a nearly 85% lift over the trailing one-month average. Further, call volume reached 3,127 contracts while put volume was 3,104 contracts. This pairing yielded a relatively even put/call ratio of 0.993.
Nevertheless, Barchart's options flow screener — which focuses exclusively on big block transactions likely placed by institutional investors — added a bit more nuance. As it turned out, net trade sentiment yesterday landed at $55,100 above parity, thus favoring the bulls.
The biggest transaction by dollar volume was $210,000 worth of sold puts expiring Sep. 19, 2025. As a credit-based transaction (due to the sale of options), we can reasonably presume that the sellers don't expect BDLR stock to fall materially below the underlying option's strike price (which was $140).
That's not definitive proof that Builders FirstSource will post an earnings surprise. However, it does seem that the smart money is confident that the company can deliver the goods.
Statistical Case Adds a Tempting Note to BLDR Stock
While deciphering unusual options activity can provide an edge, it's difficult to know for sure how the market will ultimately respond. When it comes to unusual derivatives, the fact is that investors sold $140 puts expiring in September, with a bid price of $10.60. Based on intrinsic value only, it's imperative for the put sellers that BLDR stock not drop below $129.40.
However, if we're actively speculating on Builders FirstSource, the above tidbit doesn't really tell us a whole lot about how we should structure our trade. This is where we need to think in a different framework. Here, it's helpful to consider market demand as a sentiment voting record.
Just about the only objective fact that we know is that, in the past 10 weeks, the market has voted to buy BLDR stock six times and sell four times. During this period, BLDR enjoyed an upward trajectory. For brevity, we can abbreviate this sequence as 6-4-U.
Now, at first glance, it may seem ridiculous to compress BLDR's price magnitude into a simple binary code. But what we have done here is to categorize the stock's behavior as a discrete state. Moving forward, we can compare this state against others to determine if we have an asymmetric edge. Conducting this exercise across rolling 10-week intervals (using data from January 2019 onward) gives us the following demand profile:
L10 Category
Sample Size
Up Probability
Baseline Probability
Median Return if Up
2-8-D
8
50.00%
53.06%
11.15%
3-7-D
35
51.43%
53.06%
4.40%
3-7-U
10
50.00%
53.06%
9.23%
4-6-D
27
40.74%
53.06%
6.95%
4-6-U
25
48.00%
53.06%
5.29%
5-5-D
7
28.57%
53.06%
5.35%
5-5-U
45
48.89%
53.06%
4.14%
6-4-D
14
71.43%
53.06%
5.19%
6-4-U
63
63.49%
53.06%
3.88%
7-3-D
8
87.50%
53.06%
3.49%
7-3-U
57
50.88%
53.06%
4.75%
8-2-D
5
60.00%
53.06%
3.85%
8-2-U
6
0.00%
53.06%
N/A
As you can see, the chance that a long position in BLDR stock may rise on any given week is 53.06%. This is essentially the null hypothesis, the expectation of upside assuming no mispricing and no asymmetric edge. However, my alternative hypothesis is that because the 6-4-U sequence is flashing, we have a 63.49% chance of upside, not 53.06%.
Assuming the positive pathway, the median return stands at 3.88%. That would put BDLR stock really close to the $141 level. But because we're talking about an earnings report, a positive surprise could potentially swing the share price to $145, maybe even higher.
Putting It All Together
Based on the market intelligence above, aggressive speculators may consider the 140/145 bull call spread expiring Aug. 15. This transaction involves buying the $140 call and simultaneously selling the $145 call, for a net debit paid of $190 (the most that can be lost in the trade). Should BLDR stock rise through the short strike price ($145) at expiration, the maximum reward is $310, a payout of over 163%.
Admittedly, this trade is risky because the median expected performance from the 6-4-U sequence falls short of the $145 target. That said, a positive showing for the upcoming earnings could help deliver a stronger-than-average return.
As for the sequence itself, running a one-tailed binomial test reveals a p-value of 0.0783. This means that there is a 7.83% chance that the implications of the sequence could materialize randomly as opposed to 'intentionally.' While this is a tad bit removed from the 5% threshold of statistical significance, I would make the argument that the stock market's open, entropic system allows for some wiggle room.
In other words, there appears to be something empirically intriguing about the 6-4-U. Combined with the unusual options activity and the upcoming earnings, BLDR stock deserves to be on your radar.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. This article was originally published on Barchart.com