LEN $20.84 / XHB $18.29
-Company reports Q4 earnings tomorrow before the opening.
-Options market is currently implying about a 5% move following earnings which is a little rich to the 4 qtr avg move of about 4.4%.
-Wall Street analysts are fairly mixed in the name with 12 Buys, 10 Holds, 1 Sell with an average 12 month price target of about $22.50
-Short interest is very high at almost 20% of the float, and has ticked up with the stocks recent strength back towards the 52 week highs.
-Insiders haven’t been particularly active as one director made some open market purchases when the stock was at the lows, and the COO sold almost $million worth of stock in November after the stock had bounced.
Technicals & Price Action:
-Stock is up more than 70% from the intra-day low made on Oct 4th, and already up almost 6% ytd, quickly approaching the 52 week high of 21.54 made last February. LEN has massively outperformed the SPX, which is up about 20% from the Oct 4th low.[caption id="attachment_7801" align="aligncenter" width="300" caption="1 yr SPX vs LEN from Bloomberg LP"][/caption]
Implied Volatility vs Historical:
-As stated the implied move into earnings is slightly elevated to the average move over the last year, what this means very simply is that implied volatility is a bit elevated relative to the recent realized volatility.
-At the Money Implied Volatility is offered at about 49 vs the 30 day realized vol of about 43.
MY TAKE: I have no fundamental view on the company or the qtr. Investors clearly have high expectations heading into the print, an inline qtr and guidance may not be enough to keep the upward momentum going. But as noted above, with short interest in the high teens, it would take a piece of significant unexpected negative news to really hit the stock. As for the home-building space it appears that most of the stocks, including TOL & PHM are discounted a good bit of any part of an expected housing recovery.
Rather than playing LEN into the print, a better way to express a contrarian bearish view in the space, could be to look at options in XHB. I have no particular knowledge or strong belief that the housing market has bottomed or will head back into a malaise, I just believe that there is a strong likelihood that tomorrow’s earning’s report will not supply an additional catalyst to keep the rally going. Additionally I would rather be positioned for a broad market sell off taking us to negative levels on the year.
XHB at the money vol in Jan is offered at ~29 vs the 30 day realized vol of about 34.50. What is interesting to me is that at the money implied vol in Feb is a few points higher than Jan.
TRADE: XHB $18.29 Bought the Jan 18 / Feb 16 Put Spread for .09
-Bought 1 Jan 18 Put for .23
-S0ld 1 Feb 16 Put at .14
Break-Even on Jan Expiration:
The Jan 18 Put profits below 17.91 but because I am short the Feb 16 Put my profits will be capped the closer the stock headed towards 16. This will definitely take a bit of trade management, but the premium risk is minimal.
-If the stock is 18 or above on Jan expiration the Jan 18 Put will expire worthless, but the Feb 16 put that I am short will be worth much less and at that point should at least cover that put so you are not naked short, or buy a higher strike put to turn into a put spread. But the likelihood of risking much more than maybe .15 on the whole trade is not great in the worst case scenario.
THIS TRADE STRUCTURE IS NOT FOR NOVICE OPTIONS TRADERS AND SHOULD NOT BE REPLICATED BY THOSE WHO DON’T UNDERSTAND OR HAVEN’T TRADED DIAGONAL CALENDAR SPREADS.