Toll Brothers, Inc (TOL) is a development company that designs, builds and markets homes in the United States. The company’s stock is currently trading around $37.08 in a 52 week range of $30.81-$42.19. The stock has performed relatively well this year with shares rallying nearly 8.3% year to date. Despite the strength the stock has shown this year it appears to be primed for a move lower after the release of the company’s most recent quarterly earnings report before the opening bell tomorrow morning.
TOL has sold of earnings 7 of the past 12 quarters and is lower from earnings day to options expiry 8 of the past 12 quarters with an average move of 4.66%. The stock is also not looking bullish on a chart. The stock is trading firmly inside of the Ichimoku Cloud and has not managed to trade above the cloud since late August. The stock is also trading below resistance near the top of the cloud and has failed a breakout attempt made last week. With a bearish historical movement set and a neutral to bearish chart it is difficult to justify anything but a short in TOL.
The options market is currently implying a move of around $1.60 by this Friday’s expiration. This implies a move of around 4.2% by the end of the week. This implied move is well inside of the average historical movement so it seems very likely that the stock can move at least that much. Using that implied move I can calculate a downside target around $35.50. I can then use that level to select an options trade.
Potential Trade: Buying the TOL Dec 11th Weekly 36.5-35.5 Put Spreads for $0.30
Risk: $30 per 1 lot
Reward: $70 per 1 lot
Breakeven: $36.20
This trade sets up with a better than 2-1 reward to risk ratio and hits max profit right at the downside measured move target.