Weekend Trader

Weekend Trader Series

December 25, 2022

Open Positions Update

  • Please extend the scheduled time-stop date on the Charles Schwab (SCHW) February 17, 2023, 70-strike call to Monday, January 9.
The following is this week's recommendation:

 Lennar (LEN)

Place a limit order to buy the Lennar (LEN) February 17, 2023 80-strike call at a limit price within range of the current market asked price when you place your order. At the close on Friday, December 23, this option was offered at $12.70. LEN closed at $90.62 on Friday, December 23.

Do not attempt to enter this position after Tuesday's close.

Please use the following guidelines to manage the position:
  • Exit the position if the option is at a 100% gain from your entry price.
  • If the option has not reached its target profit by 3:00 p.m. Eastern time on Monday, January 23, close the position.
  • If there is a change to the above closeout parameters, we will notify you in your regular Sunday evening communication.
The shares of Lennar (LEN) had a bullish outside day in Mid-December, after guiding first quarter earnings significantly below estimates. The reaction to this "bad" news signifies more reward than risk in the equity, as expectations are extremely low. 

Prior to that earnings report, LEN found support at its 260-day moving average, a trendline that approximates about one year's worth of trading. This moving average is historically significant, as crossovers and crosses below signaled bullish and bearish price action. What's more, the stock's recent pullback to its 20-day moving average coincides with former resistance its August and November highs and round $25 billion market cap. The equity is still trading above $90, too, which is a 50% retracement of this year's all-time high and its June low.

A shift in the options pits could fuel additional gains. Lennar stock sports a Schaeffer's put/call open interest ratio (SOIR) of 2.57, which stands higher than 99% of readings from the last 12 months. January was particularly put heavy at the 80 through 90 strikes. If the shares remain above these key strikes then we could see short covering give boost the stock over the next few weeks, as put buyers have been predominate relative to call buyers since October. It's worth noting that shorts have been covering since July, but the shares sold short still represent four days' worth of pent-up buying power. There's also room for analysts to change their tune, as eight of 11 in coverage still recommend a "hold" or worse.

Lastly, LEN's implied volatility (IV) of 42% on recommended options is slightly below its 44% historical volatility (HV). Our recommended February 80 call has a leverage ratio of 5.9, and will double on a 16.1% pop in the underlying stock.
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