Update: TOL – No Longer Betting the House

by Dan October 22, 2020 10:48 am • InTheMoney• Trade Updates

On September 9th I detailed a bullish view on shares of Toll Brothers (TOL) the U.S. homebuilder when the stock was $42. It has risen as high as $50 and just this week has come back towards $46, this week breaking important technical support, its uptrend from its March lows. It is now time to consider our options with the trade idea which is profitable.

This trade accomplished what I intended it to do, by using a calendar trade structure, selling a short-dated out of the money call, and using the proceeds to help finance the purchase of a longer-dated call of the same strike, thus reducing the cost of the bullish strategy, here was the idea:

Buy TOL ($42) Sept – Dec 45 call calendar for $3.20

The short leg of the trade idea expired worthless on Sept expiration as the stock was below the 45 strike, leaving long the Dec 45 call. Now with the stock at $46 the Dec 45 call is worth $4.60 for a $1.40 gain. This trade was worth a lot more just a couple of days ago and I think it is time to consider our options:

I see three ways to manage, close the trade, and book the profit as the technical break could signal more weakness to come. Sell a higher strike call in Dec expiration, creating a vertical call spread and reducing the premium at risk. Or rolling the bullish view up, by selling to close the Dec 45 call and buying let’s say the Dec 50 call for half the premium of the Dec 45 call.

I would opt in favor of closing the trade, the rejection at the prior high from Feb and the break of the uptrend from the March lows might be signaling an end to the euphoric housing trade: