Jim Strugger's Options Strategy For Toll Brothers

Shares of Toll Brothers Inc (NYSE: TOL) made a seven-month high on Monday and have managed to hold up the gains throughout the day. The company is going to report its quarterly earnings two weeks from now. MKM Holdings Derivatives Strategist Jim Strugger was on Bloomberg to share his option trade on Toll Brothers.

Related Link: Housing Stocks Are Mixed, This Analyst Says The Recovery "Is Still Barely On First Base"

The Trade

“This is really just a trade on the spring selling season [...] They’ll report in a couple of weeks,” Strugger said.

“The group has performed very well after some weak earnings earlier in January. We are cautiously optimistic heading into the spring selling season. On the macro scale mortgage rates are low, the employment report last week: very constructive on ongoing employment gains.”

He continued, “What we want to do is simply go out to June, implied volatility of Toll relatively low. The stock has been an underperformer over the last year. We just want to buy 40 calls outright. Simple straight-forward trade with defined risk for upside in Toll Brothers.”

Why Toll As Opposed To Other Builders?

“There are two we really like to play this potential trade,” Strugger replied. “One is Toll and they are because we think less risk of margin pressure going out over the year.

“The other is KB Home. This is a stock that trades at 0.8 times forward book, about half of the group. So, a real value name that if we do see demand for housing in the spring selling season, we think has plenty of upside relative to the rest of the group.”