Hovnanian’s shares surge on penalty resolution

* Shares up about 12 pct

* Option volume heavy, CDS tightening

By Helen Chernikoff and Doris Frankel

NEW YORK, April 21 (BestGrowthStock) – Shares of Hovnanian Enterprises
(HOV.N: ) surged on Wednesday as much as 14 percent to their highest
level since October 2008 as investors registered their relief that
a $1 million civil penalty the company must pay was not higher.

On Tuesday, the company agreed to pay the penalty to settle
allegations it violated the Clean Water Act at nearly 600
construction sites.

Option volume was heavy on Wednesday, too, as some players
positioned themselves for more share price gains, and the cost to
insure Hovnanian’s debt fell sharply.

“The settlement of the lawsuit that came out last evening
ended up better than the Street expected,” said TD Ameritrade
chief derivatives strategist Joe Kinahan. “So there is hope that
the stock can now trade higher without this looming over their
head.”

Option traders favored May calls, which conveyed the right to
buy Hovnanian shares at $7.50 apiece, Kinahan said. By late
afternoon, option traders exchanged about 16,000 call options in
Hovnanian, 10 times their average daily volume, compared to only
1,929 put options, according to option analytics firm Trade Alert.

A short squeeze in which investors shorting the stock noticed
the rise and moved to cover their positions could have amplified
upward movement, said Conifer Securities trader Brian Daley.

About a third of Hovnanian’s shares outstanding are short,
Daley said.

The Red Bank, New Jersey-based builder is the industry’s most
heavily indebted, said Fitch Ratings analyst Robert Curran, with a
debt-to-capitalization ratio of 62 percent at the end of its 2009
fiscal year.

Its credit default swaps trade on an upfront basis, which
happens when a company is considered distressed, and sellers of
protection want to be paid more at the outset of the contract due
to higher perceived risk of default.

But Hovnanian’s credit default swaps were last trading at 8
points upfront, in from 11 points early Wednesday and 16 points on
April 9.

Hovnanian’s shares were up about 11 percent at $6.26 during
late afternoon trading on the New York Stock Exchange, far
outpacing the rest of the group, which was up about 2 percent
according to the Dow Jones U.S. Home Construction Index
(.DJUSHB: ).

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(Reporting by Helen Chernikoff and Doris Frankel, additional
reporting by Ciara Linnane)

Hovnanian’s shares surge on penalty resolution