Options Active in Housing Stocks: Lennar (NYSE:LEN) and D.R. Horton (NYSE:DHI)

The OptionsHouse Hotlist is a scan of unusual option volume throughout each trading day. The Hotlist is accessible by all OptionsHouse customers, including those with virtual trading accounts.

Housing stocks saw some attention from option traders Wednesday after Tuesday’s Case-Shiller data offered a faint glimmer of hope for the housing sector. The index, which tracks home prices in 20 major U.S. metropolitan areas, rose for the third consecutive time. Prices increased in 17 of the 20 regions and are collectively 4.2% higher on a year-over-year basis.

Homebuilding name Lennar LEN is closed more than 4% higher yesterday and investors appeared to make a modestly bullish bet with a large block of short puts. In mid-morning trading on Wednesday, a block of 11,000 out-of-the-money October 13 puts crossed the tape right at the bid price of 70 cents per contract (the investor would have collected $770,000 in overall premium). Open interest at this strike was just 254 contracts heading into the session, suggesting this volume traded to open.

LEN is currently perched at $13.74 so if it holds steady, moves higher, or even declines as much as 5.3% (to the 13 strike), the investor keeps this credit collected as the put will expire worthless. This is the maximum potential profit for this trade.

If LEN is trading below the 13 strike at expiration on October 15, the put seller will likely get assigned and required to purchase the shares at an effective price of $12.30 (the strike minus the initial credit collected). Risk is then significant down to the zero mark but technically capped at $12.30. Either this investor feels comfortable in the thesis that LEN will hold above 13 through October expiration or is willing to own the stock at the $12.30 level (which is also the breakeven for this trade).

Meanwhile, in D.R. Horton DHI, another housing name, traders may be hedging themselves. The out-of-the-money October 11 call saw more than 8,000 contracts trade today on open interest of 460. The largest block (4,990 contracts) traded at 11:28 a.m. Eastern Time and went off at 43 cents, which was below the bid price at the time. It looks as though these calls may have been sold to open.

If the investor simultaneously bought stock (or already owns DHI shares), this is considered a covered call. Losses in the stock would be partially offset by the 43-cent credit collected, but the stock position would probably be called away at the 11 strike, cutting any potential gains off at the knees if the stock rallies in the next six weeks. The most the covered-call strategy can lose is the strike price minus the credit, or $10.57 (should the stock fall to zero). The maximum profit is the credit collected for selling the call plus any gains in the stock up to the strike price.

Check out the Hotlist every day for insight into names seeing unusual attention in the options pits. Refer to this article for more information on Hotlist functionality.

Photo Credit: pnwra

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