Toll Brothers Options (TOL) : Unusual Trading Activity

| September 10, 2012 | 0 Comments

Options in home building company Toll Brothers (TOL) experienced unusually high volume during Friday afternoon’s session.

Back on August 22, 2012, Toll Brothers reported solid fiscal third-quarter results.  As homebuilding unit deliveries climbed 39% year over year, average pricing ticked up about 1%.

What’s more, signed contracts also improved, with volume jumping 57% compared with last year’s third quarter.

Management said the firm is currently enjoying its best demand picture in more than five years, with the total value of contracts signed seeing increasing growth rates in each quarter of 2012 to date.

So, with this information coupled with TOL trading at multi-year highs, at least one option trader is apparently looking to profit from a further move higher.

According to our tracking system, as TOL was trading at $33.50 on Friday afternoon, a trader came in and made a large bullish bet.

He bought 4,000 TOL January $32 strike put options for $2.34 and simultaneously sold 4,000 TOL January $35 strike put options for $3.80.

Of course, this is a credit spread, so the maximum gain comes with the stock anywhere above $35 at expiration.

In this case, the maximum potential gain would be the credit of $584,000.  Not too bad for a stock that is only $1.50 away from its strike price.

So, why is this trader betting on TOL?

As many of you know, Toll Brothers focuses on the high-end homebuilding segment of the market.  As such, it caters to customers whose annual incomes contain at least six figures. 

And it just so happens things are improving for the upper middle class.

A point made crystal clear by a statistic from the company’s sales figures for last year.  During 2011, TOL delivered approximately 2,600 homes at an average price of more than $500,000 from operations in 19 states.

But that’s only half the story…

Toll should continue to post major rebounds in sales and profitability going forward.  Housing demand is likely to begin normalizing soon after recently setting generational lows.

In addition, by focusing on the high-end consumer, Toll Brothers has an advantage over the competition.  You see, TOL benefits from growth and diversification opportunities not available to homebuilders that are more focused on first-time and move-up construction.

And lastly, TOL’s modest net debt of approximately $1 billion and toned operations provide investors with high visibility on the firm’s ability to succeed despite current weak industry conditions. 

Bottom line…

Visibility is one of the most important keys in playing the options market.  And it’s quite clear some option traders feel TOL offers some visibility (clarity) when it comes to their future earnings.

It’ll be interesting to see if they’re right!

For more detailed information on unusual options activity and how you can profit from it, be sure to sign-up for our daily newsletter, Options Trading Research.  It’s always 100% free and packed full of option trading ideas you can use immediately in your own portfolio.  Click here to subscribe for free.

Safe Trading,

Marcus Haber

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Category: Unusual Options Trading Activity

About the Author ()

Marcus Haber is the co-editor of Options Trading Research and boasts well over a decade of real-life options experience. Learning from some of the biggest names in the business, Marcus has served as an Options Strategist for a number of firms and was also appointed to the Options Advsiory Board with Pershing, a branch of the Bank of New York.