The Housing has been hit very hard after the Great Recession of 2008. The stocks lost more than 75% of the Market Capitalization from their peak in 2006. In the last 1 year the housing has started seeing some positive signs and so have been the housing related stocks. Most of the markets in US have seen upward trend both in sales and prices. The number of new housing orders has been on constant rise. The stocks of many of the Home Builders like TOL, DHI have grown more than 60% in last 1 year (Not to mention LEN has doubled and PHM has tripled in last 1 year). Many people feel that they have missed the Opportunity but that’s not true. There are still opportunities to make money in the growing home builders stocks.
About the Company
The Stocks of Toll Brothers (TOL) have been continuously growing in the last 12 months. It has gained more than 60% in 2012.
The Stock is expected to grow as the housing market improves further. The company has a solid Balance Sheet with more than 5 Bn. in Assets and 2.5 Bn. in Liabilities. The cash flow situation of the company is improving. The company has started showing profits after suffering losses in 2010, 2009.
Current Stock position of Toll Brothers
The stock is currently trading at $30.85 as of Dec 13th 2012. The Company has declined after hitting 52 weeks high of $37.08
Potential Trade
Trade: Buy stocks of Toll Brothers at $30.85 and sell the CALL Option for $1.40 for Jan 18th, 2013 Strike Price of $31. This trade is called Covered Call. You can run this trade also if you are long term Bullish on TOL or currently hold the stock.
Payout of the Trade
There are 3 scenarios that can happen on the day of expiration on Jan 18th, 2013.
The breakeven for this trade is $29.45 (excluding opportunity cost and trading commissions)
- Stock price of Toll Brothers > $31: The stock will be called and you will be obligated to sell the stock at the Strike Price of $31. You will still make $1.55 ($30.85(buy price) - $31.00(strike price) + $1.40 (premium)) excluding brokerage.
- Stock price of Toll Brothers < $31.00 but >$29.45: The premium will be all yours to keep and you also own the stock. If you want you can sell the stock to book the profit. The other Option is to sell the calls for another month and collect more premiums.
- Stock price of Toll Brothers < $29.45: The premium will be all yours to keep and you also own the stock. But theoretically you have made a loss in the trade because the decline in the value of the stock is more than the premium you received to own the stock. In this situation, I recommend to keep a watch as the stock price declines and close the covered call position with the Stop Limit order.
You should execute this trade only if you are Neutral to slightly bullish on the stock. If you are Neutral to Slightly Bearish, I will recommend selling the In the Money CALL Options for $30 Strike Price. The CALLs are selling currently at $1.95. In this you’re your breakeven point is $28.90. In this case the stock has to decline by more than 7% before you incur any loss. Also, even if the stock declines by 2%, you still make 3% on your investment.
My Position:
I currently don’t have any positions in TOL and not planning to initiate any positions in the next 48 Hrs.…
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