Next Homebuilder Check Arrives Today (LEN Covered Call)

3 Min Read
601 words

Low Stress Trade For Income Is Working

Selling put options is a great way to generate income and solid annualized returns by taking less risk than owning the same amount of common stock long. When I look for these trades I target earning 2% or more for every 30 days of expiration time.

Selling a put option is a strategy where you are slightly bullish on a stock and this reduces your risk by being able to name the price (called the strike price) you are willing to pay for the company. This contract is valid for a specific amount of time called the expiration date.

These terms are set by you and for agreeing you are paid upfront for the potential obligation to buy 100 shares of stock for every put sold. I typically look at options expiration dates between two weeks and two months.

Covered Calls work in a similar fashion except you own 100 shares of stock for every call sold and you can still collect fantastic annualized returns if a stock rises, stays the same or declines slightly.

May 4th Trade Update

If you followed the trade example on May 4th where you sold the May 21 $101 puts on Lennar (LEN) for $1.10 or better for an annualized 23% return for agreeing to buy shares at a 4.7% discount to Monday May 3rd 2021 closing price. When the puts expired on Friday May 21st 2021 your brokerage account automatically bought 100 shares of LEN at $101 for every put sold.

Lennar Stock had fallen about 10% from $106 to $95 but with your adjusted cost basis of $99.9 you were only down about 5% during this time period.


Len Stock Chart

Shares are back near your cost basis: Time for your next paycheck.

Sell to open 1 July 16, $105 covered calls for every 100 shares owned for $1.95 using a limit order. You are paid 2% upfront on your cost basis and will likely receive the next $0.25 per share dividend payment in July.

At expiration if shares are above $105: you will sell your shares at $105 for a 8.15% return in two months time (May 4th to July 16th) this is an annualized return of 99%. ($105 sale - $99.9 cost basis + $1.10 put premium + $1.95 covered call premium / $99.9 cost basis= 8.15%).

At expiration if shares are below $105: you keep the shares and the income. You can now once again sell another covered call.

Protect yourself with a stop loss at $74.93. This is 25% below your cost basis or about 29% below yesterday's closing price. LEN will have fallen below Feb 2021 support levels and it makes sense to protect your remaining capital for another trade.

Lennar is a great business printing cash right now. Trading for income allows you to profit even if shares go nowhere. This is a win win strategy and you should use it today.


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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.

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