TOL: Balance of power

When I wrote about Toll Brothers Inc. (TOL), the luxury homebuilders, on June 9, I said that a break above the near-term high at that moment, $30.41, "would suggest resumption of the uptrend. (You can read the full post here.)

The price has since broken above that level four times, the highest being $30.63 today. But never decisively, and always with a pullback, today included.

These are breakouts, but breakouts without conviction. They show a finally tuned balance of power between TOL's bulls and bears.

Nothing has changed since my last analysis except that analyst enthusiasm has dropped from zero to a negative 7%.

And implied volatility has continued to decline, generally a bullish sign. It was a 38% on July 9. Now, 11 days later, it's at 35%.

Finally, we're at the last moment of opportunity to open a position in TOL before my rule kicks in that forbids opening new positions within 30 days of an earnings announcement. Toll Brothers next publishes earnings on Aug. 22.

So, decision time.

First, some numbers.

Options traders are pricing in confidence that 68.2% of trades will fall between $27.27 and $33.49 over the next month.

Call volume is running trip the five-day average, while put volume is at two-thirds of that average.

The stock is trading near the top of today's fair price zone, which runs from $29.66 to $30.34 and includes 68.2% of trades surrounding the most traded pricde, $30.32.

Decision for my account: With 3% return on equity, TOL still counts as a company in the doldrums, and that's troubling. But in my opinion we're at a point where things are going to start looking up. If I'm right, the market will anticipate that. TOL's repeated breakout attempts are a sign of that in my book.


The lower analyst enthusiasm -- not so troubling. the change was caused by an analyst dropping coverage. I show 14 analysts providing coverage at this point.


In looking at this trade, I'm happy with the chart -- uptrend in the mid-term -- and with the high call volume. 


And frankly, TOL used to build a lot in the Washington, D.C. area when I lived there. I thought then and still think that they're a smart company.


Ultimately, I think I've fallen victim to my narrative about Toll Brothers and the prospects for a recovery. Not a best practice for a private trader, to be sure. 


A grizzled trader once told the younger me, "Rules are rules. They are not for breaking." I think he then added a sentence that included the phrase "young whippersnapper".


Now that I'm the grizzled trader, I've grown to appreciate my old mentor's viewpoint. But I still disagree. Rules are for breaking if there appears to be profit in it. And for the reasons I've stated, I think there is some profit to be milked from TOL.


So, I've opened a short-term bull position in TOL, structured as a bull put options vertical spread for credit with an August expiration. I'm long the $28 put and short the $30.


The position as filled has a potential maximum profit of 38% of risk and will show a profit at expiration down to $29.45, well below the breakout level.

Disclaimer

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.

No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.