E A Full Reversal For Speculative Fever In Toll Brothers

A month ago, call buyers rushed into the stock of Toll Brothers (TOL). On September 16, TOL closed with a 5.2% gain as options traders loaded up on October monthly calls at the $41, $42, and $43 strikes. Just two days later, news of insider selling seemed to cause the stock to pull back significantly. I decided to use the selling as a buying opportunity to participate in the speculative fever. At the end of September, TOL finally closed higher than the close on September 16th. Given the distribution of call buying, I decided to sit on my profits and wait for follow-through buying. That breakthrough never arrived.

Toll Brothers (TOL)

At today's close (October 14th), TOL lost another 0.6% after trading right to the intraday low from September 16th. Susquehanna downgraded the stock on "valuation" concerns from buy to neutral. Ironically, the price target for the stock sits at $42, a healthy 7% gain from today's close. Still, investors thought the news was bad enough to push TOL into finishing full reversal of last month's gain from the call buying fever.

This complete reversal means the odds for profits on the speculative call options from last month are very low: the options expire this Friday. The market makers apparently got the situation back under control. The upshot is that as long as the upward momentum in the stocks of home builders continues, I fully expect TOL to lift-off again after market makers get this week's expiration out the way. I will be primed on Friday for some fresh buying on this latest dip. An upside $42 price target is not too bad for TOL. 

iShares Dow Jones US Home Construction Index (ITB)

Source for charts: FreeStockCharts

The iShares Dow Jones US Home Construction Index Fund ETF (ITB) has steadily, albeit slowly, trended higher since its August breakout. With TOL closing just barely above its April/May top, the stock is now lagging ITB on a relative basis. I want to position long TOL again for a presumed catch-up move at some point after this week.

Disclosure:  Long TOL call options, long ITB call spread.

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Dave Schneider 11 months ago Member's comment

Out of curiosity, why didn't the news of $TOL insider trading concern you as it did others?

Dr. Duru 11 months ago Author's comment

Because it mostly looked like the regular sell programs executives put in place. I also had a bias to interpret dips as bullish given the speculative frenzy in call options just ahead of that.

Dave Schneider 11 months ago Member's comment

Makes, sense. Thanks Dr. Duru.