Lennar Options Present Opportunity

Lennar Corporation [[LEN]] shares may have already posted a modest recovery as Obama’s economic policies come to light, but the firm’s call options still offer would-be long-term investors an attractive entry point.  The construction service company’s call options offer an attractive premium for long-term investors willing to consider a covered call position.

Lennar’s $7.50 February 2009 call options are currently selling for $1.20 per contract. This means that investors can purchase 100 shares of the underlying stock and immediately sell the rights to that stock for $120 for a return of 14.93% in just about a month. This represents an attractive annualized return that also gives long-term investors downside protection.

The worst case scenario for the position is that the stock drops and investors are forced to hold onto the shares. However, there is a built-in 15% downside protection because investors get to keep the options premium as profit to offset losses. Alternatively, if the stock moves past the $7.50 pricing point and the option is exercised, then the investor will be forced to either buyback the option or give up their shares.

Investors looking to reduce the risk of this position further while leveraging their position may want to consider using long-term options called LEAPS as a stock substitute. Currently, the $5 January 2010 LEAPS call options are trading for $4.20 per contract. This means that investors can pay $420 for the rights to 100 shares and immediately resell those rights to $120 for a 28.5% return on investment.

See “A Better Covered Call Alternative” for more information on this strategy or check out our Tools & Products for more ways to profit using LEAPS.