Post-Earnings Options Strategies in Lennar Corp. (NYSE:LEN)

Lennar after earnings Homebuilder Lennar Corporation LEN reported third-quarter earnings on Monday, entering profitable territory and exceeding analysts' expectations. The firm booked 16 cents per share, or $30 million, as revenue rose 14% to $825 million. Analysts had been expecting earnings of six cents per share.

Although new orders dropped 15% during the period, deliveries rose 10% during the quarter and the cancellation rate declined by one percentage point to 18%. Additionally, the average selling price for LEN homes edged up $1,000 to $240,000.

LEN shares jumped solidly higher in the wake of this report. With the event out of the way, implied volatility moved lower, as is often the way. With earnings now a thing of the past (until December, anyway), investors may be looking for a different way to strategize in LEN using options. The stock is higher and the volatility is lower, creating an opportunity to use long options for directional exposure.

For investors who think LEN's pop higher could be only the beginning of a longer trend, we've outlined the profit/loss potential for a short-term long call. We've also detailed a long put ratio spread strategy for the bears who are thinking about fading yesterday's earnings rally.

These strategies are for educational purposes only and should not be viewed as recommendations. All prices are as of Monday late afternoon. LEN shares were up nearly 8.5% at $15.15.

Bullish Option Strategy: Long Call

Investors anticipating more short-term upside in Lennar (and possibly a return to its May 2010 levels above 20) could consider a long call in the October series. The in-the-money October 14-strike call is priced at $1.40 currently. With the stock trading at $15.15, that is $1.15 of intrinsic value and just 25 cents of extrinsic value.

This option's delta is roughly 80, meaning the call should gain 80 cents for every $1 advance in the underlying (and will lose 80 cents for every $1 decline). As implied volatility and time until expiration change, the delta will shift as well.

At expiration, profit in the long call is theoretically unlimited above the breakeven price of $15.40 (the strike price plus the premium paid). The maximum loss, however, is limited to the premium paid, or $1.40. Below is a profit/loss diagram of this trade, built in my virtual trading account.

Bearish Option Strategy: Ratio Put Spread

Investors who expect LEN's upward drive will be short-lived could consider a put ratio spread, traded by shorting two out-of-the-money puts and buying one near-the-money put. For example, a bearish trader could go long one October 15 put and short two October 14 puts simultaneously, paying a net debit of 13 cents for the two-legged spread.

Profit is maximized if LEN closes right at the short strike (14) when the options expire on October 15. The most an investor can collect is 87 cents per spread, which is the difference in strike prices minus the debit paid. The breakevens for this put spread are $14.87 (the long strike minus the debit paid) and $13.13 (the short strike minus the maximum potential profit).

If LEN continues to rally or simply stays north of the 15 strike, the maximum upside risk is limited to the 13-cent premium. Downside risk is substantial because of the uncovered short put. If the stock declines dramatically, losses are significant (down to zero), which is equal to that of a straight long stock position due to the extra put sold.

Profit and loss of Lennar (LEN) ratio put spread