An Option for Stuck Toll Brothers

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Stock Overview – Toll Brothers (NYSE: TOL)

Toll Brothers (NYSE: TOL) is a leading builder of upscale homes in 19 states, serving step-up, empty-nest, active-adult and second-home buyers. The company operates its own lumber distribution, component-assembly and manufacturing operations. Options trading investors need to look carefully for a trade here with the stock showing little movement.

TOL is expected to announce earnings a day after Tuesday’s new home sales report. The average earnings estimate is -0.04 per share, an improvement from the loss of 24 cents a share in the same period a year ago. Investors will be watching both new home sales and TOL results to evaluate the housing market. Our sentiment is this market remains fragile as potential buyers wait to see a market recovery. TOL does not pay a dividend as it seeks to retain earnings to finance growth. TOL is focused on its financial strength and balance sheet. At this time, we see little change in the short term for stock prices.

Options Strategy – Sell the TOL Jun 19 — 20 Put Spread

Our strategy, with the stock trading around $20.20, is to sell the TOL June 19-20 Put Spread for $0.30. That is, sell the TOL Jun 20 Put for about 0.60 and buy the TOL Jun 19 Put for about 0.30. Selling the put spread has a known risk of $1.00 (the difference in the strike prices) and a maximum reward of $0.30, the amount received for selling the spread.

The breakeven in the stock price is $19.70. If the stock stays about $19.70 at June expiration the seller gets to keep the premium received from the sale of the spread.

Stutland Equities is a premier futures and options trading company on the Chicago Board Options Exchange. Founded in 2005 and headquartered in Chicago, Stutland Equities specializes in volatility arbitrage across multiple asset classes.


Article printed from InvestorPlace Media, https://investorplace.com/2011/05/an-option-for-stuck-toll-brothers-tol/.

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