Talk in all directions building on gains.
Shares of home construction giant Toll Brothers rallied 5% to a new 52-week high Monday, combining to a double-digit climb in the past week, after Bank of America raised its price target on the stock.
And options salesmen are taking advantage of the move, said Dan Nathan, co-founder and editor of RiskReversal.com.
“Usually you don’t see this sort of activity on a agent raising price targets on a group,” he said Monday on CNBC’s “Options Action,” noting that total alternatives volume in Toll Brothers’ stock was 15 times the daily average.
“Most of that was in calls, and today, buyers were buying calls right out of the gate when the stock was [$]39,” Nathan said. Toll Brothers interests rallied to above the $40 level by the end of Monday’s session.
Earlier Monday, however, buyers flocked to the October $41 hollers, Nathan said. The biggest buyer of those calls purchased 8,000 of them for 43 cents, presumably “looking to margin for just some higher highs,” he said.
When the shares were trading at $39, that trade illustrated a bet that the stock could climb as much as 5% by the October-end expiration date.
And, considering Toll Brothers’ career history, higher highs aren’t out of the question, Nathan said.
“This stock and the group in general were down a more often than not heck of a lot,” he said, pointing to a two-year chart of Toll Brothers.
“That … [$]40-ish level was kind of near-term industrial resistance,” Nathan said. “But … the stock was trading as high as [$]50 at some point in 2018. It’s a cheap estimate, trading at about 10 times [next year’s earnings estimates]. We know that obviously these aren’t great growers. They’re mid-to-low-single-digits earnings and sales. But if you think that there’s kind of some supply-demand dynamics that were equitable shaken up by this rate move, that’s why these names are moving.”
Moreover, as Toll Brothers shares father traded sideways over the past several months, options have gotten less expensive, which may be allotment of the reason for this explosion in the options market, Nathan said.
“The price of options in Toll Brothers got really penny-pinching into this consolidation the stock had been in over the last few months, so making long premium directional risks in options was a good way to do it and I think that’s what traders were thinking today,” he said.
Toll Brothers appropriates were down modestly in Tuesday trading.
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