I haven’t traded Toll Brothers Inc. (TOL) for about 12 months now.
The last time I did it was a non-directional trade and I lost money on it.
My goal? To go one for two with this beast! TOL is moving sideways for certain. At the moment, placing a directional trade on the stock doesn’t make a ton of sense because the primary and intermediate trends are sideways. What I do like is the strong support and resistance price levels that are forming along with the candlestick formation that developed on July 16, 2014. The candlestick chart opened and closed above the prior day’s black candle. That means anyone who shorted on July 15 is now losing money.
Trading Analysis
When analyzing this stock my number one question is “Where will the stock’s price most likely not go?” See, my goal is to make money by having a good idea where it shouldn’t go within a certain time frame. Therefore, I am going to sell a put option. A put option is the right to sell. Ask yourself, why would someone want to sell something for $35 if they can sell it on the open market for $37? Exactly, they wouldn’t. So I wouldn’t have a worthless option. I’m truly flipping the saying ‘buy low, sell high’ – instead I plan on selling high and buying low.
Key Levels
If TOL goes higher than $36.41, I will sell to open the Aug $35 strike. Earnings on TOL are in late August (make sure to verify this yourself), so the option will expire before earnings. My hope is that TOL simply stays above $35. I will sell for a limit of $0.40 per contract. If I sell 10 contracts this brings in $400.00. Keep in mind that one should only sell put options if they are willing and able to own shares of the company. If TOL trades down and prints below $35 on the third Friday of August I would be ‘put’ the shares of TOL: 1,000 of them if I had 10 contracts.
Bottom Line
The good news is, however, this strategy will lower my cost basis. I’ll bring in the $400.00 cash regardless. If I get put the stock shares, It will only cost me $35,000 – $400 = $34,600, and then I would immediately turn around and sell a Covered Call.
It’s fun when you have a plan! Let’s see what happens, folks. Until next time!
