The housing sector finally got a break today after the Commerce Department reported that September new home sales were up from the August numbers, to 770,000 in the month from 735,000 in August. Analysts were at best cautiously optimistic, stating that one month's report does not mean the downtrend in housing has been reversed, and also that the Commerce Department numbers are not always accurate. The figures were revised down by almost 10% in August, in fact. However, Toll Brothers (NYSE: TOL), as a luxury home builder, is somewhat less exposed to the credit problems plaguing others around the industry. If you think the September sales numbers are a good sign, then now could be a good time to look at a bullish hedged trade on TOL.
Like others in the housing sector, TOL has been beaten down this year, from a high of $35.64 in February to a low of $18.85 in August. The stock has seen some gains over the last two months, but continues to struggle against resistance in the low $20s. TOL opened this morning at $22.16. So far today the stock has hit a low of $22 and a high of $23.19. As of 2:50, TOL is trading at $22.49, up $0.31 (1.40%). The chart for TOL looks bullish with slight deterioration, while S&P gives the stock a positive 4 STARS (out of 5) buy rating.
For a bullish hedged play on this stock, I would consider a December bull-put credit spread below the $17.50 range. A bull-put credit spread is an options position that combines the purchase 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 will make an 11.1% return in just 2 months as long as TOL is above $17.50 at December expiration. The stock would have to fall by more than 22% before we would start to lose money. Learn more about this type of trade here.
TOL hasn't been below $17.50 in the last four years and has shown support around $20 recently. This trade could be risky if the September housing numbers get revised down or if October's figures show another drop, but even if this happens, TOL could be protected by support just below $20, where the stock has bounced three times in the last two months.
Meg Massie is an options analyst and writer at Investors Observer.
DISCLOSURE: At publication time, Meg neither owns nor controls positions in TOL.
TOL hasn't been below $17.50 in the last four years and has shown support around $20 recently. This trade could be risky if the September housing numbers get revised down or if October's figures show another drop, but even if this happens, TOL could be protected by support just below $20, where the stock has bounced three times in the last two months.
Meg Massie is an options analyst and writer at Investors Observer.
DISCLOSURE: At publication time, Meg neither owns nor controls positions in TOL.
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