$Lennar(LEN)$ coporation is one of the leading homebuilding companies in the US. With the real estate market experiencing a slowdown, LEN has been in the spotlight due to its upcoming earnings report. Here is a cautious view on how I might trade LEN before earnings.
Housing ETFs Jump Despite Real Estate Slowdown
Despite the recent slowdown in the real estate market, housing ETFs like ITB and home builder stocks like LEN and D.R. Horton have seen an increase in value. This indicates that investors are still bullish on the housing industry, despite the challenges that it faces. Some of the possible reasons for this include strong demand for new homes and a lack of inventory due heightened demand following a surge in remote work during the COVID-19 pandemic.
Competitors D.R. Horton (DHI) and NVR Stock’s Performance
It is worth examining the performance of LEN's competitors $D.R. Horton(DHI)$ and $NVR Inc(NVR)$ stock on the day of their earnings report in January. DHI rose 1.38% on the day of earnings while SPX closed flat at -0.07%. NVR rose 4.95% on the day of earnings while SPX rose 1.46%. This indicates that investors may be optimistic about the housing industry as a whole.
LEN Stock Performance After Reporting Earnings
Based on the past four quarters performance shown in the table below, LEN stock always rose slightly, whether they missed or beat consensus EPS. While this may indicate positive sentiment towards the company, it is essential to note that past performance does not guarantee future success.
SVB Collapse Forces Rethink on Interest Rates
The recent collapse of SVB has forced a rethink on interest rates. As a result, there may be a slower interest rate increase or pause, which is favorable to home builders. Low-interest rates can drive demand for new homes, as potential home buyers can afford higher mortgage payments. This may have a positive impact on LEN's earnings report.
Bull Call Spread May be Appropriate
LEN resistance level
Based on the above considerations, it is likely that LEN's stock may rise a limited amount tomorrow following earnings after the market close today. Therefore, a Bull Call Spread might be appropriate near the resistance of around 104 (based on the day chart above). A Bull Call Spread is a strategy that involves buying a call option with a lower strike price and selling a call option with a higher strike price. Based on prices before the market opened, I could:
Buy $LEN%2020230324%2099.0%20CALL$ $LEN 20230324 99.0 CALL$ a $3.9 call expiring next week with a strike price of 99.
Sell $LEN%2020230324%20105.0%20CALL$ $LEN 20230324 105.0 CALL$ a $1.58 call expiring next week with a strike price of 105.
My Net Premium would be negative $232 or the amount of money I would spend to create the spread
If the stock price dropped below 99, I would incur a maximum loss of $232. (excluding transaction costs)
If the stock price rose above 105, I would earn a maximum of $368. (excluding transaction costs)
For this strategy to break even, the stock would need to rise to $101.32.
The below table illustrates the possible gains and losses.
What is a Bull Call Spread?
A Bull Call Spread is a strategy used in options trading to profit from a moderate increase in the price of the underlying asset. It involves buying a call option with a lower strike price and selling a call option with a higher strike price. The potential profit is limited, but so is the potential loss. The strategy is best suited for situations where the investor expects the stock price to rise but not by a significant amount.
Taken from Investopedia
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