Filed under: Major movement, Earnings reports, Good news, Industry, Toll Brothers (TOL), Options, Technical Analysis, Housing

Toll Brothers (NYSE: TOL) shares are trading higher after the company reported a second-quarter loss of $93.7 million, or 59 cents per share, handily beating analysts’ warnings of a loss of 89 cents per share. If you think that the stock won’t fall by too much in the coming months, then now could be a good time to look at a bullish hedged trade on TOL.

After hitting a one-year high of $29.15 last June, the stock hit a one-year low of $15.49 in January. TOL opened this morning at $21.39. So far today the stock has hit a low of $21.10 and a high of $21.98. As of 12:30, TOL is trading at $21.77, up $0.81 (3.9%). The chart for TOL looks bullish and deteriorating, while S&P gives the stock a bullish 4 Stars (out of 5) buy rating.

For a bullish hedged play on this stock, I would think about a September bull-put credit spread below the $15 range. A bull-put credit spread is an options position that combines the buy and sale of put options to hedge risk in case the stock doesn’t do what you think but still leverage nice returns. For this particular trade, we’ll make a 6.4% return in just three and a half months as long as TOL is above $17.50 at September expiration. Toll Brothers would have to fall by more than 31% before we would begin to lose money. Learn more about this type of trade here.

TOL hasn’t been below $15 at all in the past year and has shown support around $20 recently. This trade could be risky if the housing market falls even farther in the coming months, but even if that happens, that position could be protected by support the stock might find around $19, where it bottomed out in March.

Brent Archer is an options analyst and writer at Investors Observer.

DISCLOSURE: Mr. Archer owns and/or controls diversified portfolios of long and short stock and option positions that might include holdings in companies he writes about. At publication time, Brent neither owns nor controls positions in TOL.

Share This

Share This

This entry was posted on Saturday, June 7th, 2008 at 9:23 am and is filed under Industry News. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.