For today’s trade of the day e-letter we will be looking at a monthly chart for Lennar Corp. (LEN), states Chuck Hughes of Hughes Optioneering.
Before breaking down LEN’s monthly chart let’s first review what products and services the company offers. Lennar Corp. operates as a homebuilder in the United States. The company's homebuilding operations include the construction and sale of single-family attached and detached homes, as well as the purchase, development, and sale of residential land, and the development, construction, and management of multifamily rental properties. Below is a Ten-Month Simple Moving Average chart for Lennar Corp.
Buy LEN Stock
As the chart shows, in November 2022, the LEN One-Month Price, crossed above the Ten-Month simple moving average (SMA). This crossover indicated the buying pressure for LEN stock exceeded the selling pressure. For this kind of crossover to occur, a stock has to be in a strong bullish uptrend. Now, as you can see, the One-Month Price is still above the Ten-Month SMA. That means the bullish trend is still in play! As long as the One-Month price remains above the Ten-Month SMA, the stock is more likely to keep trading at new highs and should be purchased. Our initial price target for LEN is 129.32 per share.
92.4% Profit Potential for LEN Option
Let’s use the Hughes Optioneering calculator to look at the potential returns for a LEN call option purchase. The Call Option Calculator will calculate the profit/loss potential for a call option trade based on the price change of the underlying stock/ETF at option expiration in this example from a -2.5% loss LEN price to a 10% increase in price.
The Optioneering Team uses the 1% Rule to select an option strike price with a higher percentage of winning trades. In the following LEN option example, we used the 1% Rule to select the LEN option strike price but out of fairness to our paid option service subscribers we don’t list the strike price used in the profit/loss calculation.
Trade with Higher Accuracy
When you use the 1% Rule to select a LEN in-the-money option strike price, LEN stock only has to increase by 1% for the option to break even and start profiting! Remember, if you purchase an at-the-money or out-of-the-money call option and the underlying stock closes flat at option expiration it will result in a 100% loss for your option trade! In this example, if LEN stock is flat at 122.30 at option expiration, it will only result in a -3.5% loss for the LEN option compared to a 100% loss for an at-the-money or out-of-the-money call option.
Using the 1% Rule to select an option strike price can result in a higher percentage of winning trades compared to at-the-money or out-of-the-money call options. This higher accuracy can give you the discipline needed to become a successful options trader and can help avoid 100% losses when trading options.
The goal of this example is to demonstrate the powerful profit potential available from trading options compared to stocks. The prices and returns represented below were calculated based on the current stock and option pricing for LEN on 6/23/2023 before commissions. When you purchase a call option, there is no limit on the profit potential of the call if the underlying stock continues to move up in price.
For this specific call option, the calculator analysis below reveals if LEN stock increases 5.0% at option expiration to 128.42 (circled), the call option would make 42.7% before the commission. If LEN stock increases 10.0% at option expiration to 134.53 (circled), the call option would make 95.9% before the commission and outperform the return on the stock by nine to one. The leverage provided by call options allows you to maximize potential returns on bullish stocks.