Option Investor

Trade Alert - LEN

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Another Big Day!

Shares of Lennar (NYSE:LEN) soared today, up nearly 5% in conjunction with the broad rally in equities. The move placed our short call position (at $55) in jeopardy, thus a "covering" order was initiated. The object of this adjustment was outlined on 5/5/05, when we noted that:

"A move above the sold (call) strike would make the current "bearish" spread untenable for most MCM traders, but if we purchased the JUN-$55 call options to cover the existing short options, there would be a relatively large profit range and time value erosion would continue to work in our favor. In addition, the implied volatility in each series is roughly equal, so we aren't buying expensive options, and the position delta (in the long calls) works in our favor if the issue trends higher prior to the May expiration. Readers who want to pursue this strategy should enter a contingent "stop-market" order to purchase five (5) contracts of the JUN-$55 call options (LEN-FK) if the stock trades above $55.25 on an intraday basis. If this event occurs, a "trade alert" will also be published in the MCM Portfolio Blog, however a mechanical order will be much more effective (timely) in transitioning to the new position."

So, the new spread is (long) 5 contracts of JUN-$55 call and (short) 5 contracts of the MAY-$55 call. Depending on your entry price, the overall debit should be $1.90 - $2.00 per contract. Looking forward, our best outcome would be for the stock to close the expiration period near $55, where the sold options are relatively worthless while the long options retain the highest amount of "premium" or time value. In any case, if the MAY-$55 calls are "in-the-money" on Friday, they will have to be repurchased in order to avoid assignment of the underlying stock. We will post (as necessary) further comments on this position in the coming sessions.

MCM Staff

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