LEN Analysis

Update 9/29/2015: LEN closed within the zone of profit the first trading day after earnings were published, dithered around for three days, and then joined the broad market n a decline that decisively made the position. I've exited for a loss.

Shares declined b y 10.3% over 11 days, or a -340% annual rate. The options produced a 40.1% loss on debit, for a -1,332% annual rate.

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The homebuilder and real-estate investment company Lennar Corp. (LEN), headquartered in Miami, Florida, publishes earnings on Monday before the opening bell.

[LEN in Wikipedia]

LEN

I shall use the OCT series of options, which trades for the last time 28 days hence, on Oct 16.

Ranges

Click on chart to enlarge.

LEN at 11:18 a.m. New York time, 30 days hourly bars

Implied volatility stands at 35.1%, which is 1.6 times the VIX, a measure of volatility of the S&P 500 index. LEN’s volatility stands in the 54th percentile of its annual range.

Ranges implied by options and the chart

Week	SD1 68.2%	SD2 95%	Chart	Earns
Upper	57.69	62.81	56.04	55.86
Lower	47.47	42.35	48.09	49.30
Gain/loss	9.7%	19.5%

Implied volatility 1 and 2 standard deviations; chart support and resistance, maximum earns move
The Trade

Iron condor, short the $55 calls and long the $57.50 calls,
short the $49 puts and long the $46 puts,
sold for a credit and expiring Oct. 17.
Probability of expiring out-of-the-money

OCT	Strike	OTM
Upper	55	70.4%
Lower	49	74.7%

The premium is $0.94, which is 31% of the width of the position’s wings.The stock at the time of purchase was priced at $52.55.

The risk/reward ratio is 2.2:1.

The zone of profit in the proposed trade covers a $3 move either way. The biggest immediate move after each of the past four earnings announcements was $3.28, and the average was $1.92.

Decision for My Account

The strike price inventory within the grid is such that I can't position the profit zone in a way that encompasses the maximum range of movement after earnings announcements for the past year. I've elected to widen one of the wings in order to increase premium to a level where it will make up for that shortage in profit zone coverage.

I've opened a position in LEN as described above.

-- Tim Bovee, Portland, Oregon, Sept. 18, 2015

References

My volatility trading rules can be read here.


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Disclaimer

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.

No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decisions for his or her own account, and take responsibility for the consequences.

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Based on a work at www.timbovee.com.