The homebuilders have moved up too far, too quickly, and after that kind of parabolic move you usually see some kind of correction. So, today I’m recommending a contrarian play…and, most importantly, a very cheap play: a ratio put debit spread in Toll Brothers Inc (NYSE:TOL):
Using a spread order, buy to open 1 TOL Dec. 29th $45.50 put and sell to open 2 TOL Dec. 29th $42.50 puts.
Note: There are several December expirations available for TOL options. Be sure you are opening the weekly options that expire on Friday, Dec. 29, 2017.
A ratio debit spread is simply a way to lower the cost of buying options, as the two option(s) that you sell to open (short) helps offset the cost of the option that you buy to open. Therefore, this ratio put debit spread is a way to lower the cost of establishing a bearish put option trade. Many brokers will require the use of margin and/or a set amount of reserved capital and/or a margin account to execute a debit spread; contact your broker directly for specific requirements.
Because you are short a naked put in this ratio put debit spread, the risk is that you could be obligated to buy 100 shares of TOL at the $42.50 strike price for every 1 contract that you are short of the TOL Dec. 29th $42.50 puts. So, to avoid that, you’ll want to exit if TOL gets down to $42.50.
Ken Trester is editor of the popular Maximum Options program. Trester has been trading options since the first exchanges opened in 1973 with a winning streak that goes back to 1984 with money-doubling average annual profits since 1990.