Option Trade of the Week – There’s No Place Like Home

June 20, 2023

Have you seen the results for our Option Trade of the Week lately? Last Friday, two more trades – an iron condor on TLT and call credit spread on NEE – expired worthless for an average gain of 32%. That makes 10 winners in the last 11 trades! I hope you’re taking advantage of these profit makers.

Here’s your Option Trade of the Week as included in this past weekend’s Saturday Report for our Terry’s Tips Insider Members. This is a post-earnings bullish trade on a stock we’ve converted into gains of 55% and 28% in previous weekly trades. The stock didn’t do much today, so you should be able to get close to the price my members pocketed today.

Good luck with the trade!   

There’s No Place Like Home

Sticking with a past winner is never a bad strategy. That’s why this week I’m going to make this very simple. I’m going with another bullish play on a stock we’ve successively traded twice within the past 9 months for gains of 28% and 55%. It’s on homebuilder Lennar (LEN), which once again blew the front doors off expectations with this week’s earnings report.

Although revenue and income fell from a year earlier, both came in well above the consensus analyst estimate … by a lot. Earnings per share came in 29% above the estimate, while revenue beat by more than a billion dollars. Home deliveries beat the projection by 9%. And to complete the blowout, LEN raised its fiscal Q3 and full-year delivery estimates well above the analyst forecast.

Analysts responded with a flurry of target price increases, though none was willing to upgrade the stock. It’s hard to get a handle on analyst sentiment, as different sources offer widely divergent data. Yahoo!Finance claims the average rating is between a buy and hold, while the average target price is $124.47. Benzinga claims the consensus rating is neutral and the average target is $95.92. With LEN closing at $120 on Friday, it’s safe to say that neither target price nor average rating is optimistic.

But I’m fine with that. I suppose analysts are looking at interest rates and guessing that home buyers will wait for the Fed to pivot lower (good luck with that). But resale inventory is low as homeowners are trapped into keeping their lower interest-rate mortgages. That frees up demand for new homes. At some point, analysts should recognize LEN’s longer-term potential and free up a few ratings upgrades. That should give the shares a boost.

That’s what we’re seeing on LEN’s chart, which shows the stock nearly doubling its year-ago price. In fact, the shares hit an all-time high on Friday. Unlike some stocks – chips, for example – LEN’s gains have been steady, guided higher by both the 20-day and 50-day moving averages. I can’t use those trendlines to pick the short strike of our put spread because the stock rallied late in the week. But I can use recent highs near the 116 level as a potential site of support.

If you agree that LEN will continue to gain on the strength of its fundamentals, consider the following credit spread trade that relies on the stock staying above 116 (blue line) through expiration in 6 weeks:

Buy to Open the LEN 28 Jul 114 put (LEN230728P114)
Sell to Open the LEN 28 Jul 116 put (LEN230728P116) for a credit of $0.50 (selling a vertical)

This credit is $0.02 less than the mid-point price of the spread at Friday’s $120.02 close.  Unless LEN surges at the open on Tuesday, you should be able to get close to that price.

The commission on this trade should be no more than $1.30 per spread. Each spread would then yield $48.70. This trade reduces your buying power by $200, making your net investment $151.30 per spread ($200 – $48.70). If LEN closes above 116 on July 28, both options will expire worthless and your return on the spread would be 32% ($48.70/$151.30).   

Happy trading,

Jon