Lennar was recently mentioned in a list of stocks near buy points, and last week it bounced off the rising 50-day moving average.
Traders can go long the stock. But aggressive traders can use options to trade a leveraged position via a strategy known as a poor man's covered call.
To execute a poor man's covered call, the trader will buy a long-term, deep in-the-money call and sell a short-term out-of-the-money call.
The long-term bought call effectively replaces the long stock position at a fraction of the cost.
To trade a covered call on Lennar stock, an investor would need to buy 100 shares of the stock at a total cost of around $15,500.
A similar exposure can be obtained through buying a Jan. 17, 2025, call with a strike price of 145. That call was trading for around $26.45 late Friday, or $2,645. That's much less than it would cost to purchase 100 shares.
Lennar Stock Option Trade Could Generate Income
The trader can hold that call as a bullish trade or sell calls against that position. That reduces the cost and generates some income.
For example, selling a March 15 call with a strike price of 160 would generate $355 in premium. And it would still provide some capital gain potential.
The downside of the trade is that gains and losses will be magnified. That's because you are effectively trading a leveraged position.
In terms of risk management, I would rethink the position if Lennar stock dropped below 142. That's around 8% below the current price.
The delta of the initial position is 30, which means the exposure is equivalent to owning 30 shares of Lennar. But this will change over time as the stock moves.
Traders Can Keep Selling Calls On Lennar Stock
If the March 160 call expires worthless, traders can continue to sell monthly calls against the long call option.
According to the IBD Stock Checkup, Lennar stock is ranked No. 4 in its industry group. It has a Composite Rating of 95, an EPS Rating of 81 and a Relative Strength Rating of 91.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ
