Short Squeeze on Homebuilder Could Lift LEN Shares

09/21/2010 12:01 am EST

Focus: STOCKS

Jocelynn Drake

Financial Analyst, Schaeffer's Investment Research

Lennar Corp. (LEN) stepped into the earnings confessional this morning and the homebuilder announced that it saw a fiscal third-quarter profit of $30 million, or 16 cents per share, compared to a loss of $171.6 million, or 97 cents per share, in the year-ago period. Revenue was up 14% to $825 million. Analysts had expected, on average, a profit of four cents per share on revenue of $760.2 million. Revenue from home sales increased 10% in the three months ending August 31, said Lennar, mostly due to a 9% increase in the number of home deliveries.


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Heading into the earnings report, options players picked up puts at a rapid pace. The International Securities Exchange (ISE) reports that 1.8 puts were bought to open for every one call during the past ten trading sessions. This ratio of puts to calls is higher than 90% of all those taken during the past year. In other words, options players have picked up puts at a faster pace than calls only 10% of the time during the past 12 months.

However, there is still ample room for pessimism to grow. The Schaeffer's put/call open interest ratio for LEN comes in at 1.02, which is lower than 69% of all the readings taken during the past year.


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Meanwhile, short sellers are feeling squeezed today. The number of LEN shares sold short increased by 10.5% during the past month to stand at 17.4 million. This accumulation of bearish bets accounts for 13% of the company's total float. An unwinding of these pessimistic positions could add some lift to the shares.

By Jocelynn Drake, contributor, Schaeffer’s Trading Floor Blog

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