The homebuilder Lennar Corp (LEN) is scheduled to report fiscal Q4 results tomorrow morning before the open. The options market is implying about a 4.3% one day move, which is rich to the 4 qtr average move of 3%, but a tad shy of the 10 year average one day earnings move of about 4.8%.
Year to date shares of LEN are up nearly 10%, up nearly 20% from its January lows, and down about 12% from its mid August highs:[caption id="attachment_59371" align="aligncenter" width="600"] LEN 1yr chart from Bloomberg[/caption]
The year to date chart above shows the stock’s consolidation, and the narrowing of the range since the broad market volatility in August and September. As the range grinds tighter I suspect that the stock will be poised for a break one way or the other.
Taking a longer term view, the 5 year chart below shows the stock holding the uptrend from the 2011 lows like a boss![caption id="attachment_59372" align="aligncenter" width="600"] LEN 5 yr chart from Bloomberg[/caption]
After yesterday’s telegraghed Fed Funds rate rise from the Fed, I was puzzled as to why homebuilders and autos were rallying as hard as they were. I guess the key word there was telegraphed as both groups are down about 2% today, dramatically under-performing the SPX. It is a logical conclusion that a rate hike would most immediately adversely affect large purchases that generally require credit like houses and cars. It’s my sense that while housing and auto data has been good leading up to the rate increase (in fact some measures reaching pre financial crisis levels) we might have reached a tipping point towards these groups, at least in terms of sentiment and that any bad news will be taken as such given the uncertainty of the potential headwinds from higher interest rates.
That being said, the yield on the 10 year Treasury is at 2.25%, 8 basis points above where it ended last year, despite the end of QE at the end of 2014, and the impending end of ZIRP.
While its our sense that rates are not going up too far to fast, I suspect decent guidance will be viewed somewhat skeptically, and weak guidance will be taken at face value.
We want to make a defined risk bearish bet that LEN has a similar reaction to peer Toll Brothers (TOL) last week after a decent report but mixed commentary which sent the stock down 7%.
*Trade: LEN ($48.95) Bought Jan 48 / 44 / 40 Put ButterFly for 70 cents
-Bought to open 1 Jan 48 put for 1.40
-Sold to open 2 Jan 44 puts at .425 each, or 85 cents total
-Bought to open 1 Jan 40 put for 15 cents
Break-Even on Jan Expiration:
Profits: up to 3.30 between 47.30 and 40.70 with max gain of 3.30 at 44
Losses: of up to 70 cents between 47.30 and 48 & between 40 and 40.70 with max loss of 70 cents below 40 and above 48
Rationale: Implied vol is only slightly elevated into the event but we still wanted to reduce as much out of the money premium risk as possible in case we’re wrong on initial direction. If we do indeed see a move lower and the fly becomes in the money vol should decrease both because the event has passed but also because of holiday trading. If the stock does move lower, intrinsic gains won’t immediately be realized and patience will be in order. However, with a break-even at 47.30 and a max gain at the 44 strike the trade any move lower and we should be in good shape. The worst scenario is obviously a move higher on the event, and a stock unchanged and we would suffer losses on vol coming in.