By David Russell of OptionMonster
NEW YORK -- Dovish remarks by Federal Reserve Vice Chair Janet Yellen before the Senate Thursday fueled a bullish feeding frenzy in homebuilder stocks.
OptionMonster's tracking systems showed that upside activity began early in Lennar (LEN) as traders piled into the November 35 calls expiring Friday. They initially paid as a little as 5 cents, but then the stock started moving and those calls exploded higher. At one point by early afternoon they fetched as much as 40 cents -- a gain of 700% in a matter of hours.
Calls lock in the price where a stock can be purchased. They're usually really cheap compared with the underlying shares, which is why they can generate such extreme leverage. Almost 9,000 of the November 35s were bought against open interest of 4,811 contracts.
Lennar shares rose 2.67% to $34.22, but at one point were up almost 5%. The entire homebuilding group enjoyed a huge run between late 2011 and early 2013 but has paused since May. Higher interest rates, which can hurt their business, have contributed to the weakness.
It's "imperative that we do what we can to promote" economic growth, Yellen told lawmakers on Thursday. That was interpreted as a sign that the next head of the Federal Reserve will continue buying Treasury bonds to keep interest rates low.
Similar upside activity occurred in D.R. Horton (DHI), with buyers gobbling up 19,000 November 20 calls for 3 cents to 16 cents. PulteGroup's (PHM) November 17.50 calls also traded more than 3,500 times for 6 cents to 51 cents. D.R. Horton rose 2.83% to $19.59, and PulteGroup climbed 4.87% to $17.86.
Russell has no positions in any of the stocks mentioned.