Buy A Great Homebuilder at 14% Discount

Financial Markets are down and put option premiums are rising. Great time to sell put options on strong businesses.

Interest rates remain suppressed at the lowest levels in history and an increasing number of investors are looking for hard assets to preserve and grow their wealth. Additionally with the ongoing corona virus pandemic people are fleeing cities for less populated areas. The combination is a continuing boom for the housing sector.

The housing market is trading at a faster rate than any time since 2006 making homebuilding one of the strongest market sectors and great for homebuilder stocks.

With financial market volatility rising and stocks in general having a pullback, now is a great time to collect income by selling put options. Every put option sold represents 100 shares of stock you are willing to buy for a set price (called the strike price) during a certain period of time. For this obligation you are paid upfront a premium.

The safest way to sell put options is to only do so on stocks you wish to hold long term. For example if you are happy to own 100 shares of LEN today you can buy it at $73 per share at the market. By selling 1 put you are now paid upfront a premium to buy the shares you were already happy to own at a lower agreed upon price. If shares are trading higher than your strike price at expiration the put contract expires worthless, you keep the premium and the locked up capital is free for other market opportunities.

Lennar (LEN) is a $23 billion company which builds, sells, and finances homes in over 20 US states.

With the virus uncertainty LEN sales were down last quarter but the company is maintaining pricing disciple so the profit margin remained at 10%. Over the last 12 months the company reported record profits, earnings per share and free cash flow.

The share price has recovered nicely from the pandemic lows and is currently rising along with the 50 day moving average.

With the overall market declining, shares of LEN are likely to have a pullback. The strong housing market should provide support and Lennar's share price is likely to maintain its uptrend.

Trade details:

Sell to open the October 16 $65 LEN put for $2.35 or better using a limit order. You will be paid 3.6% premium upfront for agreeing to buy shares at a 13% discount to yesterday's closing price.

At expiration if shares are above $65: put sellers keep the $2.35 for a 31% annualized return.

At expiration if shares are below $65: put sellers will buy shares a about 16% discount to yesterday's closing price on your adjusted cost basis ($65 - $2.35). You now own 100 shares of stock for every put sold and can earn more income by selling covered calls.

For protection use a stop loss at $59. Shares will be below the 200 DMA and a larger sell off will be likely.

---

Disclosure: I wrote this article myself, and it expresses my own opinions. I have no business relationship with any company whose stock is mentioned in this article. The information provided should NOT be considered advice. The topics discussed are risky and have the potential to lose a substantial amount. I am not an investment professional and therefore do not offer individual financial advice. Please do your own research before investing.

Need a Hive account? Sign up free here!

Posted Using LeoFinance