Trade Update Jan 20th, 2012 at 12:10pm: With expiration 4 hours away, the Jan 18 puts that I bought prior to LEN‘s earnings will expire worthless with the stock at 18.77 (barring a very unlikely move below $18 btwn now and the close). As you may recall in an effort to lessen the purchase of the Jan Puts, I sold the Feb 16 puts against them. Prior to today’s close I will have to make a decision of what to do in an effort not to be naked short those options……I am bidding .09 for the Feb 16 puts to close this position out for what will be an .18 loss, the original .09 purchase of the calendar and then when I am filled a .09 loss to close the Febs.
Trade Update Jan 11th, 2012 at 12:40pm: In a lot of ways yesterday’s preview and my inaction in LEN, and then my desire to express a view in the home-builder etf, XHB should be a very instructive trade for those readers who have not traded calendars or diagonal calendars.
I had absolutely no view on the earnings report and no view on LEN as a company. Pretty strict rule I TRY to live by in trading, NO CONVICTION, NO TRADE. The only thing that I felt strongly about was that while the stock has been up a lot since the OCT lows, ” with short interest in the high teens, it would take a piece of significant unexpected negative news to really hit the stock”. So in a prudent fashion I stayed away from the stock with the event and look for a structure was not 100% path dependent on LEN results.
The company reported a profitable quarter and held a fairly upbeat conference call after the market opened. The following intra-day chart shows that the stock intially reacted slightly favorably to the actual results reported pre-open, but then started to rally a little after 11pm during the conference call with management when they started saying things like:
[caption id="attachment_7823" align="aligncenter" width="300" caption="Intra-Day chart LEN from Bloomberg LP"][/caption]
*LENNAR SAYS IT BELIEVES HOUSING AT OR NEAR BOTTOM OF DOWNTURN
*LENNAR SEES DEMAND GROWING IN MOST OF ITS COMMUNITIES
*LENNAR: THIS YEAR WILL SEE SIGNS OF BEGINNING OF THE RECOVERY
I guess the key point here, you have to remain aware of factors like HIGH SHORT INTEREST. It didn’t take much to get this stock going even after the 70% rally since OCT and breaking out to multi-year highs,
This stock is going to start flashing up on a lot of technicians screens, especially with short interest where it is. The 5 year chart below shows a lot of room overhead once it gets through this $21-22 level.[caption id="attachment_7825" align="aligncenter" width="300" caption="LEN 5 yr chart from Bloomberg LP"][/caption]
As for MY trade. I am long the XHB Jan 18 Puts for .23, they are now worth .10 with the stock up 1.7% today. The XHB Feb 16 Puts that I am short are now also worth .10 (sold them at .14) So net net if I were to close the trade it would probably cost me the premium that I paid for the trade (.09).
So for now, with the sector up on the LEN commentary I am going to hold out for a bit and see if XHB retraces a bit of this recent move. At this point, no harm no foul.
Original Post Jan 10th, 2012: Q4 Earnings Tomo Pre-Open, I Use XHB to Express My View
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 have 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.