Homebuilder Toll Brothers (TOL) is benefiting from a couple tailwinds as the company heads toward next week’s quarterly earnings report.
Earlier this month, the National Associate of Realtors reported that existing home sales rose to an annualized ratio of 5.15 million in July. Furthermore, median home prices also came in higher, rising 4.9% year-over-year in July.
Currently, Wall Street is anticipating a profit of 46 cents per share from Toll Brothers when it reports Wednesday, Sept. 3, but whispers on the Street indicate that some analysts might be factoring in the recent NAR figures. Specifically, EarningsWhisper.com reports that the whisper number for Toll Brothers’ third-quarter earnings arrives 4 cents higher at 50 cents per share.
It’s not a bad bet, either. During the past two years, Toll Brothers has only missed Wall Street’s targets once, beating the consensus quarterly earnings estimate six times during this time frame, according to Zacks data.
That said, there is still a little trepidation lingering in the brokerage community. Checking in with data from Thomson/First Call reveals that 12 of the 22 analysts following TOL stock still rate it a “hold” or worse.
That wealth of indifference (10 “holds”) might stem from the fact that the stock is trading less than 10% away from the consensus 12-month price target of $39 per share. A positive report next week could shake loose some of these bears, creating an opportunity for TOL bulls.
Turning to TOL stock options activity, we find that bullish activity is running rampant. In fact, the front-month put/call open interest ratio arrives at 0.22, as calls more than quintuple puts in the September series. Peak call open interest here totals 20,152 contracts at the out-of-the-money Sep $37 strike, while another 9,171 contracts are open at the overhead Sep $36 strike.
Click to Enlarge Overall, September implieds are pricing in a potential post-earnings move of about 5.2%. This places the upper bound near $37.36, while the lower bound lies at $33.64.
A post-earnings rally puts TOL stock in contention with former resistance at $37.50, but boosts the stock above a key technical hurdle at $36. A downside move, on the other hand, perches TOL stock just above technical support in the $33-$33.50 region.
3 Options Trades on TOL Stock
Call Spread: Traders looking to position themselves ahead of Toll Brothers’ report might want to consider siding with the bulls and entering a Sep $36/$37 bull call spread, as it offers considerable potential should TOL stock move as expected. This spread was last offered at 32 cents, or $32 per pair of contracts. Breakeven lies at $36.32, while a maximum profit of 68 cents, or $68 per pair of contracts, is possible if TOL stock closes at or above $37 when September options expire.
Selling Puts: Alternately, if you’re a bit more reserved in your post-earnings expectations for TOL stock, you could look into a bull put sell position. Along those lines, a Sep $33 put sell might be a way to capitalize on TOL’s technical support in the $33-$33.50 region. The Sep $33 put was last bid at 30 cents, or $30 per contract. The upside to this put sell strategy is that you keep the premium as long as TOL stock closes above $33 when September options expire. The downside is that should TOL trade below $33 when September options expire, you could be assigned 100 shares for each Sep $33 put sold at a cost of $33 per share, so make sure your accounts has enough funds to handle this event.
Debit Spread: Finally, if you have done the math and are really daring, you could combine these two strategies into a three-pronged trade: selling the Sep $33 put and the Sep $37 call, while purchasing the Sep $36 call. The total cost of this spread comes in at just 2 cents, or $2 per pair of contracts. Breakeven lies at $36.02, while a rather sizeable maximum profit of 98 cents, or $98 per set of contracts, is possible if TOL stock closes at or above $37.
Remember, this Sep $33/$36/$37 debit spread has the same drawbacks as the put sell position above, with the potential for being assigned 100 shares at $33 each if TOL stock closes below $33 when September options expire.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.