Lennar (LEN) is trading up 4.4% to $36.50 in the wake of the company's earnings report. Option flow heading into earnings was very heavy with 19K calls and 14K puts trading on the stock on Monday. Upside calls in July led the most actives, with a buyer paying $0.93 for the July 36-39 call spread in afternoon action when shares were near $35. They bought the July 36s for $1.61 and sold July 39s at $0.68, to open. The spread is now bid at $1.10. In this case, it appears that an investor made a smart directional bet in the homebuilder ahead of the results.
In addition to looking for bullish or bearish options trading in specific stocks ahead of earnings, the past track record around earnings if often intersting as well. For instance, as we can see from the graphic below, the average daily move in LEN over the past eight quarters is 4.7%, so today's move is mostly in-line with the past. Some stocks are simply bigger earnings movers compared to others. So, seeing what happened in the past is often an important indicator of what might happen in the future.
In summary, some of the factors to consider when looking to enter or exit a positoin in front of an earnings report include 1) the directional bias being displayed in the order flow 2) what is the post-earnings move history 3) is the market pricing in for the potential for a big move. In the case of LEN, the directional order flow was bullish, and the market was implying a larger post-earnings move compared to previous quarters. It turns out, the directional flow seemed to foreshadow the move higher, but the premiums were a bit too jacked up compared to the stock's behavior around past earnings reports. Situations where there is strong directional sentiment and relatively low expectations (relative to past post-earnings moves) are the best trade set-ups around earnings. Of course, those are far and few between.
OptionsProfits can be followed on Twitter at twitter.com/OptionsProfits.
Select the service that is right for you!COMPARE ALL SERVICES
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV